RBI MPC Minutes: Iran War, El Nino Push FY27 CPI Forecast

What the RBI flagged in the latest MPC minutes

The Reserve Bank of India has cautioned that the ongoing conflict involving the US and Iran could adversely affect India’s growth and push inflation higher in 2026-27. The warning came through the minutes of the Monetary Policy Committee (MPC) meeting released on Wednesday. The RBI linked the risk primarily to higher energy prices and the knock-on effect on freight, insurance, and supply chains. It also highlighted a separate domestic risk from weather-related disruptions tied to El Nino. Together, these factors represent a supply-side shock that can raise prices while weighing on output. The central bank said it would be prudent to take a wait-and-watch approach amid rapidly evolving global conditions. It also noted that the duration of these shocks will determine the eventual economic cost.

Conflict channels: energy, freight, insurance, and supply chains

The MPC minutes noted that higher input costs associated with rising energy prices could impair growth by squeezing downstream sectors. The RBI pointed to a combination of international freight and insurance costs and potential supply-chain disruptions as key transmission channels. It warned that constrained availability of key inputs could limit production capacity across sectors that depend on imported intermediates and commodities. The central bank also flagged the Strait of Hormuz as a specific risk point, where disruptions can trigger supply shocks for energy and other inputs. Elevated energy and other commodity prices, along with availability shocks, were seen as a drag on domestic production in 2026-27. The minutes also reflected the RBI’s assessment that the global economic outlook has deteriorated significantly after the outbreak of the conflict. Even where retail fuel prices have remained unchanged, the RBI signalled that higher global input costs can still feed into inflation over time.

El Nino: downside risk to growth, upside risk to inflation

Beyond geopolitics, the RBI highlighted the risk of El Nino disturbances and their potential impact on the Southwest Monsoon. MPC member Ram Singh said weather-related events pose downside risks to the domestic growth outlook and upside risks for the inflation trajectory. The minutes noted that El Nino is expected to hit agriculture the hardest, given the sector’s dependence on rainfall. El Nino typically occurs every two to seven years and is linked to warmer-than-average sea surface temperatures in parts of the Pacific Ocean. In India, it is often associated with weaker monsoon rainfall between June and September. The RBI also said it will closely monitor possible supply disruptions for the upcoming Kharif season amid a rising probability of El Nino conditions. Weather-linked food price volatility remains a key watchpoint in the inflation outlook.

Inflation forecast revised: FY27 CPI seen at 4.6%

Considering the global conflict and climate cues, the RBI revised its CPI-based inflation outlook upwards to 4.6% for FY27. It also provided quarterly projections for the year. The first quarter projection was pegged at 4.0% compared with an earlier 3.9%. The second quarter projection was put at 4.4%, described in the report as down from 4.2%. For the third and fourth quarters, CPI inflation was projected at 5.2% and 4.7%, respectively. The RBI indicated that recent spikes in energy prices due to the conflict have emerged as a risk. It also said the intensity and duration of the conflict, and damage to energy and other infrastructure, add risks to both inflation and growth. The central bank stressed that while the direction of these risks is clear, how long they last will determine the quantum of the impact.

Policy decision: rates unchanged, stance stays neutral

On April 8, the RBI kept interest rates unchanged and reaffirmed a neutral policy stance. The MPC unanimously voted to retain the repo rate at 5.25%, in line with market expectations. The Standing Deposit Facility (SDF) rate was kept at 5%, and the Marginal Standing Facility (MSF) rate at 5.5%. The RBI said the neutral stance provides flexibility to respond judiciously to incoming information. The central bank’s messaging combined caution on inflation risks with confidence in India’s growth momentum. It reiterated that it remains vigilant and is monitoring the balance of risks. The wait-and-watch approach was framed as a response to uncertainty around global conditions.

Five risks the RBI highlighted for India

In a detailed assessment referenced alongside the policy communication, the RBI outlined a set of risks that could build if supply disruptions persist. First, elevated crude oil prices could increase imported inflation and widen the current account deficit. Second, disruptions in energy markets, fertilisers, and other commodities may lower domestic output across industry, agriculture, and services. Third, heightened uncertainty and risk aversion could tighten domestic liquidity conditions and affect consumption and investment. Fourth, weaker global growth prospects may reduce external demand and lower remittance inflows. Finally, spillovers from global financial markets could tighten domestic financial conditions and push up borrowing costs, with some effects described as already visible.

Key numbers at a glance

Timeline: war developments and policy signals

Market and macro impact: what the RBI said is already visible

The RBI noted that while the direct impact of higher global energy prices had been muted due to unchanged retail fuel prices, input costs could still exert upward pressure going forward. It also said core inflation is expected to pick up gradually as input cost pressures transmit through the economy. Separately, it highlighted that uncertainty and risk aversion can tighten liquidity and financial conditions, affecting borrowing costs and spending decisions. The report also stated that equities and bond benchmarks declined and the rupee hit a record low since the war began, reflecting heightened stress in financial markets. At the same time, the RBI maintained that India’s fundamentals remain on a stronger footing, which it sees as improving resilience to shocks compared with the past.

Why the minutes matter for investors and businesses

The minutes provide a clearer map of the RBI’s reaction function under a supply shock: rates are on hold, but the inflation forecast has moved up and risks are tilted higher. For businesses, the RBI’s emphasis on freight, insurance, and input availability highlights where cost pressures can appear even without immediate changes in retail fuel prices. For investors, the combination of a neutral stance and explicit risk channels suggests that incoming data on crude, shipping routes, and monsoon conditions will carry more weight in near-term policy expectations. The RBI also underscored that persistence, not just direction, will decide how meaningful the impact becomes. That framing matters because it links future policy choices to how long the conflict-driven disruptions and El Nino conditions last.

Conclusion

The RBI’s latest MPC minutes place the US-Iran conflict and El Nino risks at the centre of the FY27 inflation-growth assessment, while keeping policy rates unchanged and the stance neutral. With FY27 CPI inflation projected at 4.6% and growth projected at 6.9%, the central bank has signalled caution without committing to immediate action. The RBI said it will remain vigilant and monitor evolving conditions, including energy prices, shipping disruptions, and the monsoon outlook, before taking decisive steps.