RBI flags Iran war risks, lifts FY27 inflation to 4.6%

Why the RBI is sounding a fresh caution

The Reserve Bank of India (RBI) has warned that the ongoing conflict involving the US and Iran could weaken India’s growth outlook and push inflation higher in the coming financial year. In the minutes of the Monetary Policy Committee (MPC) meeting released on Wednesday, the central bank flagged rising energy costs and supply disruptions as key risks to economic stability. The RBI said higher input costs, driven by energy prices, freight charges and insurance costs, could hit the availability of essential raw materials. The central bank also pointed to the Strait of Hormuz as a potential source of supply shocks that could weigh on domestic production in FY 2026-27.

MPC keeps policy steady and retains a neutral stance

In its latest policy decision, the RBI kept the benchmark repurchase (repo) rate unchanged at 5.25%, with the six-member MPC voting unanimously. The policy stance was retained at neutral. RBI Governor Sanjay Malhotra said the rate-setting panel chose to “wait and watch” amid heightened geopolitical uncertainty. The RBI also said the full impact of the conflict, particularly through energy costs, will become clearer over the coming months. The central bank’s message was that it does not want to pre-emptively tighten or ease until the growth-inflation trade-off is better defined.

How oil and shipping disruptions feed into inflation

The RBI outlined multiple transmission channels through which the West Asia conflict can affect India. It cited rising crude oil prices, higher logistics and shipping costs, disruptions to global trade routes, and increased commodity price volatility. Malhotra also warned that elevated crude prices can increase imported inflation and widen the current account deficit. The central bank highlighted the risk of “second-round effects” if higher costs begin to weigh on demand and delay investment recovery. It also cautioned that what starts as a supply shock can potentially turn into a demand shock if supply chain restoration is delayed.

Inflation outlook revised upward to 4.6% for FY27

Taking global tensions and climate risks into account, the RBI revised its CPI-based inflation forecast to 4.6% for FY27. The central bank’s quarterly inflation path for FY27 was given as 4.0% in Q1, 4.4% in Q2, 5.2% in Q3 and 4.7% in Q4. The RBI also, for the first time, provided a core inflation forecast for the current financial year, pegging it at 4.4%. Governor Malhotra said inflation is within the target band for now, but upside risks have increased due to volatile oil markets.

India’s March inflation shows early energy effects

India’s consumer price index (CPI) rose 3.40% year-on-year in March, up from 3.21% in the previous month, and in line with the median market forecast. The data was described as the first full month of inflation readings after the conflict began, with pass-through effects of energy prices becoming gradually visible. Food prices rose 3.87% year-on-year in March. The RBI noted that early energy shocks are emerging, but they remain largely under control so far.

High dependence on Middle East energy raises exposure

India remains highly dependent on Middle Eastern energy supplies, importing about 90% of its crude oil and more than half of its liquefied petroleum gas. That dependence increases India’s vulnerability when geopolitical risks threaten supply routes. Following the collapse of weekend peace talks, US President Donald Trump announced a blockade of the Strait of Hormuz, which intensified market concerns around supply disruptions. International oil prices subsequently moved back above $100 per barrel.

Growth outlook: resilience, but risks have risen

Even as it flagged risks, the RBI said India’s economic fundamentals are on a stronger footing and provide greater resilience than in the past. High-frequency indicators suggest the economy remains strong, with support from private consumption and investment demand. Still, the RBI acknowledged that higher oil prices and shortages of key inputs like gas could weigh on this momentum. Separately, the RBI forecast GDP growth at 6.9% in 2026-27, compared with an expected 7.6% in the year ended March 31, 2026.

What the RBI says could be hit first

The central bank highlighted “dual risks” from geopolitical uncertainty and climate-related disruptions. It identified agriculture as vulnerable, especially if monsoon rains fall below normal levels. It also flagged manufacturing pressures from higher input costs, and transport and logistics disruptions from shipping and insurance costs. If supply disruptions continue, the RBI warned of risks to industrial output, availability of key industrial inputs, and growth in downstream sectors.

Market signals and policy space

After the policy decision, Indian benchmark 10-year bond yields fell to around 6.92% from over 7.04%, reflecting near-term relief as oil prices dipped after news of a two-week ceasefire. However, the RBI’s communication remained cautious because commodity and energy volatility can return quickly if supply routes remain threatened. Economist Sakshi Gupta of HDFC Bank said the pass-through to retail inflation remains limited for now, but prolonged disruptions and persistently high energy prices could force producers to pass on costs as margins compress. Gupta also said the latest inflation data suggests the RBI still has policy space before it would need to consider a hawkish shift.

Key numbers to track

Bottom line

The RBI’s latest MPC minutes and policy messaging centre on a “wait-and-watch” approach as geopolitical risks raise the odds of higher imported inflation and supply disruptions. The central bank has lifted its FY27 inflation forecast to 4.6% and warned that disruptions around the Strait of Hormuz could weigh on domestic production in FY 2026-27. For now, the repo rate remains unchanged at 5.25% with a neutral stance, while the RBI monitors oil prices, shipping costs, input availability, and signs of broader second-round effects in inflation.