RBI warns US-Iran war could lift FY27 inflation to 4.6%

What the RBI is warning about

The Reserve Bank of India (RBI) has cautioned that the ongoing conflict between the US and Iran could weaken India’s growth outlook and push inflation higher in the coming financial year. The assessment was outlined in the minutes of the Monetary Policy Committee (MPC) meeting released on Wednesday.

Policymakers pointed to higher energy costs and potential supply disruptions as key risks to economic stability. Alongside geopolitical uncertainty, the RBI also highlighted climate-related risks, including the possibility of El Niño-linked weather disruptions.

Energy prices, freight, and insurance costs in focus

The RBI said higher input costs associated with rising energy prices and international freight and insurance costs could disrupt supply chains. In the central bank’s view, these pressures may constrain the availability of essential raw materials and key industrial inputs.

Such constraints can raise production costs and slow activity in downstream sectors that depend on imported or globally priced inputs. The RBI framed these risks as supply-side shocks that can spill over into broader inflation and growth outcomes if they persist.

Strait of Hormuz disruption risk for FY26-27

The central bank flagged that supply shocks linked to disruptions in the Strait of Hormuz could weigh on domestic production during FY 2026-27. It noted that elevated energy and other commodity prices, coupled with input availability shocks, could act as a drag on domestic output.

In this context, the RBI indicated that a “wait-and-watch” approach would be prudent before taking major policy actions, given uncertainty around the intensity and duration of the conflict and any damage to energy and related infrastructure.

El Niño adds a second layer of uncertainty

Apart from geopolitical tensions, the RBI highlighted concerns about the potential impact of El Niño on India’s economy. MPC member Ram Singh warned that weather-related disruptions linked to El Niño could create downside risks to economic growth and upside risks to inflation.

The RBI noted that while food inflation has been supported by strong agricultural output, including robust rabi production and adequate buffer stocks, it remains sensitive to weather patterns.

Inflation outlook revised upward to 4.6% for FY27

Taking account of global tensions and climate risks, the RBI revised its consumer price index (CPI)-based inflation forecast upward to 4.6% for FY27. The projection remains within the RBI’s target band of 2% to 6%.

For the first time, the Reserve Bank also gave a core inflation forecast of 4.4% for the year. In the background data cited, inflation averaged 1.95% in the first 11 months of FY26.

Growth projections and what they assume

The RBI projected GDP growth of 6.9% in FY27, down from an expected 7.6% in FY26. These baseline estimates assume an average crude oil price of $15 per barrel.

The minutes and related commentary also underlined that the ultimate impact on India will depend on how long geopolitical tensions and climate disruptions persist.

How sensitive are growth and inflation to oil prices?

The RBI provided specific sensitivity estimates around crude oil.

• A 10% rise in oil prices from current levels could push up inflation by 50 basis points and shave 15 basis points off growth.
• In an alternative scenario discussed by economist DK Srivastava, if crude averages $15 per barrel in FY27, growth could fall to 6.7% and inflation could rise to 5.0%, compared with the baseline of 6.9% growth and 4.6% inflation.

The material also highlighted how import costs can move with oil prices: every $10 increase in crude prices adds roughly $12-15 billion to India’s annual import bill.

Five transmission channels flagged by Governor Sanjay Malhotra

RBI Governor Sanjay Malhotra listed five ways the Middle East conflict can transmit to India’s economy.

1. Imported inflation and current account deficit: Elevated crude oil prices could raise imported inflation and widen the current account deficit.
2. Lower output from commodity disruptions: Disruptions in energy markets, fertilisers, and other commodities may reduce domestic output across industry, agriculture, and services.
3. Tighter liquidity from risk aversion: Heightened uncertainty and safe-haven demand could affect domestic liquidity conditions, consumption, investment, and overall activity.
4. Weaker external demand and remittances: Slower global growth could reduce external demand and remittance flows.
5. Higher borrowing costs: Spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing.

The RBI also warned that what begins as a supply shock can potentially turn into a demand shock over the medium term if supply chain restoration is delayed.

Repo rate held at 5.25% with a cautious stance

In the same policy setting, the six-member MPC voted unanimously to keep the benchmark repo rate unchanged at 5.25%, while continuing with a neutral stance. The RBI said fundamentals are on a stronger footing than in the past, offering greater resilience, but it emphasised vigilance given global risks to inflation, liquidity, and financial stability.

Key numbers at a glance

What this means for sectors and inflation drivers

The RBI’s risk map points to stress points across agriculture (weak monsoon risk), manufacturing (higher input costs), and transport and logistics (shipping disruptions and higher freight costs). It also noted that pass-through effects are already visible in select segments such as LPG, premium petrol, and diesel used for industrial purposes.

For investors and businesses, the key takeaway from the minutes is that the RBI sees “dual risks” from geopolitics and climate. The central bank’s chosen response, for now, is to keep policy steady while monitoring how energy prices, shipping routes, and weather conditions evolve.

Conclusion

The RBI’s MPC minutes underline that the US-Iran conflict and El Niño-related weather risks could lift inflation and weigh on growth in FY27, prompting a cautious “wait-and-watch” approach. The next signals for markets are likely to come from how crude prices track the $15 per barrel assumption, the status of shipping routes such as the Strait of Hormuz, and incoming data on monsoon and food inflation conditions.