RBI warns 2026 inflation risk from oil, war, El Niño

What the RBI’s April MPC minutes signalled

Minutes from the Reserve Bank of India’s April Monetary Policy Committee (MPC) meeting show policymakers turning more cautious as global risks intensified. The six-member MPC met on April 6–8 and discussed how geopolitical tensions in West Asia and rising crude oil prices are complicating India’s inflation and growth outlook. Governor Sanjay Malhotra highlighted three immediate concerns: rising global energy prices, the conflict in West Asia, and possible weather disruptions linked to El Niño. The minutes framed the episode as a supply shock with the potential to spill over from headline inflation into broader price behaviour.

Rate decision: repo held at 5.25%, stance neutral

The MPC voted unanimously to keep the benchmark repurchase (repo) rate unchanged at 5.25%. It retained the policy stance at neutral, citing elevated uncertainty after the West Asia conflict drove crude prices sharply higher. The minutes also flagged the role of a weak rupee, volatile financial markets, and disrupted trade flows in shaping the policy debate. The committee’s messaging was cautious, with the minutes noting: “The economy is confronted with a supply shock… it is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook.”

Three inflation risk drivers: oil, conflict, and El Niño

Governor Malhotra’s risk assessment in the minutes and related communication focused on three channels. First, higher global energy prices can lift fuel and transport costs quickly, adding near-term pressure to consumer prices. Second, the West Asia conflict is disrupting logistics and supply chains, with implications for both prices and growth. Third, possible El Niño conditions could weaken the monsoon, reduce crop output, and push up food inflation, with edible oils such as palm oil facing higher prices due to lower supply and higher import costs.

How the West Asia conflict transmits to India

The RBI described multiple transmission channels from the West Asia conflict into the Indian economy. Malhotra said the conflict poses challenges through exports, supply of critical commodities, elevated energy and other commodity prices, remittances, uncertainty, and subdued global demand. The minutes noted that supply chain disruptions may take longer to subside fully and restore the logistics network, creating downside risks to growth and upside risks to inflation. The conflict near the Strait of Hormuz was also flagged as a factor disturbing global transport, with disruptions potentially taking months to normalise.

Fuel, LPG and industrial costs: early signs of pass-through

The minutes stated that global energy price increases have already led to price hikes in premium petrol, LPG, and industrial diesel. For households, the risk is a higher cost of LPG and retail fuels such as petrol and diesel, if higher input costs persist. For industry, higher fuel and logistics costs can raise production costs across sectors, particularly in transport-intensive supply chains. The RBI also noted stress in segments dependent on gas, pointing to shortages for MSMEs that use natural gas as fuel.

Fertiliser and agriculture: another inflation pressure point

The West Asia conflict also creates risks beyond crude oil. Reports cited in the article said about 26% of India’s fertiliser imports come from West Asian countries, making supply interruptions a concern for availability and prices. Malhotra also said West Asia contributes two-fifths of India’s fertiliser imports, underlining the exposure of farming inputs to regional disruption. If fertiliser costs rise or supplies tighten, that can feed into farm economics and food prices, particularly when combined with weather risks.

RBI’s inflation view for 2026–27 and the “second-round effects” risk

Inflation is expected to rise to 4.6% in 2026–27, within the RBI’s tolerance band but with upside risks from energy prices and weather disruptions such as El Niño. In his remarks, Malhotra said the central bank would remain “circumspect and vigilant” and stay focused on incoming data and global developments. He warned that “second-round effects are the real concern,” describing the risk that initial price shocks spread into wages, services, and core prices. He also said the RBI is in “wait-and-watch mode,” signalling no hurry to move on rates while keeping flexibility under a neutral stance.

What the minutes said about growth risks

Several MPC members linked higher crude prices to the growth-inflation trade-off. Prof. Ram Singh said crude prices have surged more than 40% in recent weeks, shifting the trade-off and shaving up to 60 basis points off growth, and also cited a 50–60 bps impact on the growth forecast due to the West Asia conflict. External member Nagesh Kumar highlighted India’s dependence on Middle East energy imports and said the Strait of Hormuz crisis could worsen the current account deficit. The minutes broadly indicated that while domestic demand remains resilient, external headwinds have intensified.

Key numbers and facts at a glance

Why this matters for markets and policy into 2026–27

The RBI’s assessment matters because it frames current pressures as a supply shock that monetary policy cannot directly reverse, while still needing to prevent inflation persistence. Malhotra’s emphasis on expectations and “second-round effects” indicates the central bank’s priority is avoiding a broader embedding of inflation across the price system. The minutes also show how energy prices, the rupee, and disrupted trade flows can tighten financial conditions even without a rate change. For investors and businesses, the key message is that the inflation outlook is being shaped heavily by global developments, and policy will remain data-dependent rather than pre-committed.

Conclusion

The April MPC minutes and Malhotra’s subsequent remarks underline rising inflation risks from crude prices, West Asia disruptions, and potential El Niño-linked food shocks. With the repo rate held at 5.25% and the stance kept neutral, the RBI signalled a cautious “wait-and-watch” approach. The central bank’s next steps, as described in the minutes, depend on how supply disruptions, energy prices, and inflation expectations evolve.