RBI flags West Asia risk: second-round inflation in 2026

What the RBI governor flagged in his Princeton speech

Reserve Bank of India Governor Sanjay Malhotra has warned that the West Asia conflict can create inflation risks for India that go beyond the immediate jump in commodity prices. Speaking at Princeton University on April 18, Malhotra said the bigger concern is the “second-round effects” that can arise when supply disruptions last long enough to shape broader price behaviour. He described these effects as the risk that an initial supply shock becomes embedded in the general price level. The comments come amid uncertainty over supply chains and energy markets, including the possibility of a surge in oil prices linked to the US and Israel war against Iran.

Malhotra’s framing indicates that the RBI is watching not just headline inflation prints, but also whether inflation expectations start moving higher. He also said the central bank would be “even more dependent on data” and would continuously reassess the balance of risks. In uncertain conditions, he stressed the need to be nimble and agile while maintaining a broad policy stance.

Why “second-round effects” matter more than the first shock

Malhotra distinguished between the first-round impact of a supply shock and the second-round dynamics that can follow. The first-round effect is the direct price rise from higher input costs, such as oil, gas, or freight. The second-round effect is when those higher costs spill over into wider goods and services prices and can influence wages and pricing decisions across the economy.

He said second-round effects can materialise if supply chain disruptions continue for long. In that case, what began as a supply shock can become embedded in the general price level. This is the scenario that can make inflation more persistent and harder to reverse quickly.

Monetary policy focus: expectations, not blunt demand compression

Malhotra said monetary policy has a primary role in preventing this entrenchment, mainly through its influence on inflation expectations. He contrasted this with “blunt demand compression,” signalling caution on reacting aggressively to short-term supply-driven inflation.

He also said monetary policy should not overreact to supply shocks like oil price spikes unless they begin to alter broader price behaviour. In his words, the appropriate response is to look through the first-round effect to the extent that it does not feed into second-round dynamics. This approach implies that the RBI’s immediate focus is on anchoring expectations rather than tightening policy solely because of a temporary supply-side jump.

India’s exposure to West Asia, in the RBI’s numbers

Malhotra said the current crisis has a significant impact on India because of the country’s economic linkages with West Asia. He cited the region’s share in exports, imports, crude oil, fertilisers, and remittances as key channels through which a prolonged disruption could affect inflation and growth dynamics.

Policy stance: wait-and-watch, but more data dependent

Malhotra said the RBI would be in a wait-and-watch mode in the face of uncertainty, particularly because geopolitical shocks can evolve quickly. He emphasised the importance of being nimble and agile, maintaining a broad policy stance, and reassessing risks as new information arrives.

He also said the RBI would be even more dependent on data now. That indicates a stronger reliance on incoming indicators to evaluate whether supply disruptions are fading or becoming persistent enough to influence expectations and broader inflation dynamics.

Repo rate context and what it signals

The article notes that the RBI’s Monetary Policy Committee has maintained the repo rate at 5.25%. In this context, Malhotra’s comments reinforce that the central bank is weighing supply-side risks alongside growth considerations. He pointed out that energy supply disruption can impact economic growth, underlining why the RBI may be cautious about tightening policy purely in response to a supply shock.

How oil and gas pricing can pass through to inflation

Malhotra said oil marketing companies and the government have absorbed some of the price pressures in oil. He also noted that a portion of the pressures on gas prices has been passed on to consumers. These details matter because they show how shocks can either be absorbed temporarily or transmitted into retail inflation.

With the article also noting that inflation is expected to rise amid supply-related disruptions and a surge in oil prices due to the conflict, the RBI’s focus shifts to whether these pressures remain contained or spread across categories.

Growth backdrop cited by the governor

In his remarks, Malhotra pointed to India’s growth performance over the last decade. He said India achieved an average growth rate of 6.1% annually over the last decade, compared with the global economy’s growth rate of 3.2%. This backdrop helps explain why policy calibration matters: tightening too aggressively to counter a supply shock can affect growth, while doing too little can risk inflation becoming entrenched.

What could determine the next steps

Malhotra said the inflation trajectory and any future policy response will depend on how long the current disruptions persist. The longer supply chain disruptions and energy market strains continue, the higher the risk that inflation expectations adjust upward.

His comments do not claim that second-round effects have already materialised. Instead, they define the threshold that would matter for policy: whether the initial shock begins to alter broader price behaviour and expectations.

Key takeaways for markets and households

For investors and households, the central message is that the RBI is monitoring persistence and spillovers rather than reacting automatically to a one-off spike in oil or shipping costs. The emphasis on expectations suggests the RBI will scrutinise whether price pressures are becoming generalised.

At the same time, Malhotra’s focus on India’s exposure to West Asia highlights why energy flows and supply chains remain a key watchpoint for inflation and growth. The RBI’s stated approach keeps the policy stance flexible, with decisions tied to how the risks evolve in the data.

Conclusion

Malhotra’s Princeton speech puts the policy spotlight on second-round inflation risks from prolonged West Asia disruptions, especially through energy and supply-chain channels. The RBI is signalling a data-dependent, wait-and-watch approach, with the repo rate currently at 5.25% and policy geared toward anchoring inflation expectations. Future policy moves, as outlined by the governor, will hinge on whether the current supply shock remains temporary or begins feeding into broader price behaviour over time.