RBI wait-and-watch as West Asia risks cloud FY27

What changed in RBI’s risk assessment

The Reserve Bank of India has shifted its near-term macro focus to the inflation risks that could build from the escalating West Asia conflict, even as it avoids rushing into immediate tightening. Governor Sanjay Malhotra described the situation as a supply shock with the potential to become more persistent if disruptions last. The RBI’s core concern is not the first spike in prices, but whether inflation expectations get unanchored. That is why the central bank is adopting a flexible “wait and watch” stance rather than committing to a preset policy path. The approach is meant to preserve room to respond as the depth and duration of disruptions become clearer. Policymakers also flagged that heightened global uncertainty complicates the trade-off between growth and inflation. The RBI said it will look through initial disruptions like oil-price jumps unless they begin to change broader price behaviour.

Malhotra’s message from Princeton on supply shocks

Addressing students at Princeton University in the United States on April 18, Malhotra said the appropriate monetary policy response is to ensure the supply shock does not persist long enough to become embedded in the general price level. He emphasised the need to remain “agile and nimble” and avoid firm commitments on the future path of policy. The conflict, particularly risks around the Strait of Hormuz, has created a supply shock affecting energy, fertilisers and commodity prices. That mix raises the risk of imported inflation through higher input costs and logistics. Malhotra also highlighted “second-round effects”, where a temporary price jump can get baked into the economy-wide inflation process. This is the backdrop to the RBI’s strategy of watching for signs that higher costs are spreading beyond the initial shock. His framing signals that policy action depends more on persistence and pass-through than on the first headline move in global prices.

MPC decision: repo rate unchanged, stance stays neutral

In its April meeting, with decisions announced on April 8, the RBI’s Monetary Policy Committee kept the benchmark repurchase rate unchanged at 5.25% and retained a ‘neutral’ stance. The decision was unanimous among the six-member panel, reflecting a preference to assess evolving conditions rather than react immediately. The MPC cited heightened geopolitical risks after the West Asia conflict drove crude prices sharply higher, weakened the rupee and disrupted trade flows. RBI communications repeatedly described the episode as a supply-side shock. The central bank’s position is that India’s macro fundamentals are stronger than in past shocks, improving resilience. Still, the tone also acknowledged that risks have risen on both inflation and growth. The RBI indicated it is prepared to adjust if price behaviour deteriorates.

FY27 projections: growth trimmed, inflation risk higher

The RBI now expects the Indian economy to grow 6.9% in 2026-27, with risks tilted to the downside. In the current GDP series, which has annual growth data till 2023-24, this is the lowest and the first sub-7% growth print in that series. Inflation projection for 2026-27 stands at 4.6%, and the RBI says risks are tilted to the upside. It also projected consumer inflation at 4.4% for the second quarter of the fiscal, higher than the earlier 4.2%, while keeping first quarter inflation unchanged at 4%. The RBI noted headline inflation rose to 3.2% in February from 2.7% in January, mainly due to unfavourable base effects, even as momentum remained muted. It also pointed out that excluding precious metals, core inflation is even lower, indicating underlying pressures are expected to remain contained. Even so, policymakers stressed that the balance of risks has worsened due to energy and supply-chain factors.

Why the Strait of Hormuz matters for India

The Strait of Hormuz sits at the centre of the RBI’s current risk framing because it is a critical global energy chokepoint. Any disruption can push up crude oil prices sharply and raise India’s import bill. Malhotra warned that disruptions linked to Hormuz could affect the availability of key inputs across sectors, amplifying supply-chain stress. The RBI also underlined India’s heavy exposure to the region. West Asia supplies half of India’s crude oil and two-fifths of its fertiliser. That dependence means prolonged disruption is not just a market event, but a direct threat to domestic inflation and growth. Higher international freight and insurance costs were also flagged as channels that can raise landed costs for imports.

From supply shock to demand shock: the RBI’s warning

The RBI warned that what begins as a supply shock can potentially transform into a demand shock over the medium term if restoration of supply chains is delayed. In his written statement after the MPC meeting, Malhotra listed several spillover channels. He flagged higher oil prices and rising agriculture inflation due to higher input costs. He also cited weaker global growth prospects that may dampen external demand and reduce remittance flows. In addition, adverse spillovers from global financial markets could tighten domestic financial conditions and raise borrowing costs. Together, these channels can weigh on consumption, investment and overall economic activity if the situation drags on. This is why the RBI is closely monitoring duration, not just the magnitude of the initial shock.

What the “look through” strategy is, and its risks

The RBI is “looking through” initial price shocks, meaning it is not reacting immediately to the first-round jump in oil or freight costs. The risk, as Malhotra highlighted, is second-round effects that alter broader inflation behaviour. The central bank’s stated priority is anchoring inflation expectations to prevent prices from becoming unstable. But the article also points out the downside of waiting too long in a highly import-dependent economy. Sustained elevated oil prices, potentially above $10-$100 per barrel, could widen India’s current account deficit, weaken the rupee further, and increase government subsidy costs. It added that oil above $100 per barrel might push CPI inflation towards 5.5%-6%. These are presented as scenario risks that become more relevant if disruptions persist.

What offered temporary relief, and why RBI stayed cautious

Markets turned more optimistic after a temporary ceasefire between the US and Iran cooled crude oil prices and eased immediate fears of supply disruption. However, the RBI’s messaging remained measured. Policymakers indicated they are focused on the risk that tensions could flare up again and disrupt energy flows through Hormuz. The MPC also flagged probable weather disturbances affecting food prices as an additional upside risk to inflation. While the food price outlook was described as comfortable in the near term, supported by robust rabi production, adequate reservoir levels and comfortable buffer stocks, the likely emergence of El Niño conditions was cited as a risk. In this setting, the RBI chose to keep policy tools unchanged while it reassesses the balance of risks.

Key numbers and signals at a glance

What to watch next: policy triggers and timeline

The RBI’s next policy moves will depend on how long and how severely West Asia-related disruptions continue. The central bank has signalled that it will not respond to every initial spike, but it will act if supply shocks begin to alter broader price behaviour. Prolonged supply chain disruptions are explicitly mentioned as a condition that could require a policy adjustment. Citibank’s Chief India Economist Samiran Chakraborty noted that the RBI’s statement was balanced, with the temporary ceasefire offering an opportunity to assess risks while uncertainty remains high. The next RBI MPC meeting is scheduled for June 3 to June 5. Until then, the RBI’s “wait and watch” stance is aimed at preserving flexibility while keeping inflation expectations anchored.