West Asia conflict: RBI rate outlook and inflation risks

Why the West Asia conflict is back on India’s macro radar

The ongoing conflict in West Asia is reintroducing inflation risk at a time when policymakers are trying to sustain growth momentum. Department of Economic Affairs Secretary Anuradha Thakur said on May 26 that the conflict has stoked inflation and softened business sentiment, creating a difficult environment for central banks. She framed the challenge as keeping inflation under control without weakening growth.

The issue is not only domestic. A finance ministry report and central bank commentary point to the conflict as a supply-side shock that is feeding into prices through energy costs, logistics disruptions, and tighter financial conditions. With markets watching the next Reserve Bank of India (RBI) policy decision closely, the key question is how long the shock persists and how much it transmits into broader inflation.

What Anuradha Thakur said on May 26

Speaking at CNBC Awaaz Bharat Economic Samvad on May 26, Thakur said the West Asia conflict has fuelled inflation and dampened business sentiment. Her remarks highlighted the policy trade-off faced by central banks. On one side is the need to contain inflation expectations, and on the other is the need to maintain growth momentum.

Her comments align with the broader official narrative that the current episode has a strong supply-side component. That distinction matters because supply shocks often raise prices while simultaneously weakening activity, narrowing the room for traditional demand-management tools.

Finance ministry’s April review: supply shock and spillovers

In the Monthly Economic Review for April, released by the finance ministry, the conflict was described as a significant supply-side shock, with rising risks to inflation, trade and financial flows. The report said India is feeling the impact through higher energy import costs and tighter financial conditions.

At the same time, the ministry said India’s strong domestic demand, policy buffers, resilient financial system and continued public investment are expected to provide a measure of insulation. But it also cautioned that prolonged uncertainty, particularly around energy and fertiliser supplies, could test macroeconomic stability.

The review flagged a second-order risk: if high prices persist, inflation could turn cost-push as businesses pass higher input costs to protect margins. It also warned that an accompanying demand compression is a serious concern in a high-price environment.

Global inflation outlook: disinflation trend interrupted

The report warned that the conflict has halted the global disinflation trend that began in 2023. It projected inflation in developed economies to rise from 2.6% in 2025 to 2.9% in 2026. In developing economies, inflation was projected to accelerate from 4.2% to 5.2%, reflecting higher energy, transport and import costs.

It also noted that the shock is being felt most sharply in energy markets, intensifying cost pressures for households and businesses. While global financial markets have absorbed the initial shock in an orderly manner, higher energy prices have pushed up inflation expectations and short-term bond yields.

RBI’s April MPC: status quo at 5.25% and a “wait and watch” tone

Minutes from the RBI’s Monetary Policy Committee (MPC) meeting held between April 6 and 8 show policymakers were increasingly focused on inflation risks amid global uncertainty. The six-member MPC unanimously decided to keep the benchmark repo rate unchanged at 5.25% and maintained a neutral stance.

The minutes pointed to heightened volatility in global markets, a weakening rupee, and disrupted trade flows linked to the conflict. The committee characterised the situation as a supply shock and indicated it was prudent to wait for greater clarity before taking aggressive action.

Governor Malhotra cautioned that the West Asia conflict poses multi-dimensional challenges to India, including risks to exports, commodity supplies, remittances, and global demand. He also warned that prolonged supply chain disruptions could raise inflationary pressures while dampening growth.

Strait of Hormuz disruptions, crude sensitivity, and inflation pass-through

A key transmission channel highlighted in the policy discussion was energy. The MPC minutes referenced how the attack on Iran began on February 28, after which Iran stopped the Strait of Hormuz for cargo movement, leading to a spurt in crude prices. The minutes also noted that Iran later blocked Hormuz again after a brief period of allowing cargo movement.

Such disruptions can lift import costs and complicate the inflation outlook, especially when logistics networks take time to normalise. Malhotra said supply chain disruptions may take longer to subside fully and restore logistics, creating downside risks to growth and upside risks to inflation.

Monsoon risk adds another layer to food-price uncertainty

Beyond imported inflation, the finance ministry’s April review flagged the risk of a weather shock. It noted that if a gradual recovery is not supported by a good kharif output, a price shock in headline inflation could spill over into core inflation through a cost-push channel.

The report referenced the IMD’s prediction of a below-normal monsoon and possible El Niño conditions. The MPC minutes also recorded concerns among members about El Niño’s potential impact on inflation.

Rate outlook: June policy meeting and FY27 expectations

Market attention has also turned to the near-term policy path. The context provided indicates that the RBI is likely to keep interest rates unchanged in the June MPC meeting.

Separately, the consensus view cited in the text suggests at least a 50-basis-point hike could be in place in FY27 to combat inflationary pressure from supply chain disruptions linked to the West Asia war. This expectation reflects the risk that supply-side pressures may persist long enough to influence medium-term inflation dynamics.

Key facts at a glance

Timeline of notable references in the text

What matters for investors and businesses

For businesses, the main concern is input-cost volatility, especially via energy and transport costs, and the possibility of margin pressure if cost increases cannot be fully passed on. For households, energy-driven inflation can reduce real incomes, which the finance ministry review linked to broader price pressures across goods and services.

For markets, the report noted higher energy prices have pushed up inflation expectations and short-term bond yields, tightening external financing conditions for developing economies. In India, the RBI’s emphasis on the shock being supply-driven supports a cautious, data-driven stance in the near term, even as longer-duration disruptions could alter the inflation-growth balance.

Conclusion

The official commentary across the finance ministry, the DEA, and the RBI converges on a common point: the West Asia conflict is a supply-side shock with meaningful inflation risks and uncertainty effects. The RBI has responded by holding the repo rate at 5.25% and signalling a wait-and-watch approach.

The next immediate checkpoint is the June MPC meeting, where rates are indicated to remain unchanged, while the medium-term debate will hinge on how persistent the supply disruptions and energy-cost pressures prove to be, alongside monsoon-related risks flagged by the IMD.