India inflation risks 2026: RBI flags supply shocks

What the RBI is worried about

India’s inflation risks have risen due to supply-side disruptions linked to the West Asia conflict and weather-related uncertainty, the Reserve Bank of India said in its monthly economic report released on April 23. While headline inflation has remained within the RBI’s tolerance band, the central bank cautioned that the balance of risks has shifted upward. The RBI also flagged the possibility of second-round effects, where an initial supply shock could start to look like a demand shock over time.

Supply chains and the West Asia conflict

The RBI said a prolonged conflict in West Asia, if it keeps supply chains disrupted and delays restoration of logistics networks, could create challenges for India’s domestic economy. In its assessment, the conflict has led to severe disruption of global supply chains and poses an “unprecedented challenge” to the global economy by pushing prices higher and weakening global growth. For India, the RBI highlighted several transmission channels, including elevated energy and commodity prices, risks of disruption through the Strait of Hormuz, and higher freight and insurance costs.

What the April MPC minutes reveal

The minutes of the RBI’s April Monetary Policy Committee (MPC) meeting show members were focused on the growth-inflation trade-off created by a supply-driven shock. Governor Sanjay Malhotra said supply chain disruptions could take longer to subside and posed downside risks to growth and upside risks to inflation. He also warned that if the conflict remains unresolved for long, central banks could find it harder to rein in inflation expectations while limiting the sacrifice in growth.

“Wait and watch” policy stance

The MPC’s conclusion, as reflected in the minutes and policy language, was that it is prudent to “wait and watch” as circumstances evolve. The RBI’s reasoning was that the present shock is supply-driven rather than demand-led, which limits what an immediate rate response can achieve. One member cautioned that the risk of a policy mistake has increased in an uncertain environment, while another argued that looking through a supply shock can be optimal because pre-emptive tightening may reduce output without delivering a meaningful inflation benefit.

Growth and inflation projections for FY27

Deputy Governor Poonam Gupta said growth is projected to be slightly milder at 6.9% for FY27, as global uncertainty rises and the economy faces an external supply shock. The RBI’s projection for CPI inflation for 2026-27 is 4.6%, and the minutes flagged that Q3 is seen at 5.2%. For the first time, the RBI also provided a core inflation projection of 4.4%.

The RBI’s baseline assumptions included crude oil prices at $15 per barrel in the current fiscal year and $15 per barrel in the next. Separately, the report also noted that crude oil prices averaged $103 per barrel in March and were expected to remain high amid uncertain supply.

Why the RBI sees risks rising despite inflation staying in band

The RBI said inflation may have been contained within the tolerance band, but upside risks have increased due to supply-side disruptions, including weather-related uncertainties. It also highlighted the possibility of second-round effects, where prolonged supply constraints and higher input costs can eventually weaken demand conditions. Governor Malhotra, in his written statement after the meeting, said the initial supply shock can potentially transform into a demand shock over the medium term if supply chains are not restored quickly.

External buffers and financial stability signals

The RBI said India’s foreign exchange reserves remain comfortable and provide cover for goods imports of around 11 months. This buffer matters because a prolonged energy shock can widen the trade deficit and transmit imported inflation through higher crude and commodity prices. Members also noted the risk that global financial spillovers could tighten domestic financial conditions and raise borrowing costs, especially if risk aversion increases.

Market reaction: bonds, rupee, equities

Markets responded positively to news of a ceasefire, according to the report. Benchmark bond yields fell 15 basis points to 6.89%. The rupee strengthened 40 paise to 92.58 per dollar. The Sensex rose 3.95% to close at 77,562.

Key numbers at a glance

How economists and industry bodies read the message

Economist Samiran Chakraborty of Citibank said the RBI’s statement combined calm about stronger macro fundamentals with realism about downside risks to growth and upside risks to inflation, resulting in a wait-and-watch approach. Madan Sabnavis of Bank of Baroda said the inflation risks reduce the chances of further rate cuts. Rajeev Juneja of PHDCCI described the decision as a balanced approach amid supply-side disruptions, while 360 ONE Asset’s Vikram Chhabra pointed to elevated uncertainty with risks tilted to weaker growth and higher inflation.

What to watch next

The RBI has framed the current phase as a supply shock with uncertain duration, making oil prices, supply-chain restoration, and weather outcomes key swing factors for the FY27 outlook. The central bank has also explicitly flagged the risk that a prolonged supply shock could spill into demand conditions. The next data points on inflation prints, crude price dynamics, and signs of sustained logistics normalisation are likely to shape how long the RBI stays on hold.