West Asia conflict: RBI warns growth-inflation risks FY27

What the RBI flagged in its April 2026 Bulletin

The Reserve Bank of India has warned that the West Asia conflict is adding to downside risks for growth and upside risks for inflation, even as it described India’s macroeconomy as resilient. In its April 2026 Bulletin, the central bank pointed to elevated oil prices, heightened global uncertainty, and financial volatility as key risks. It said global supply chain disruptions intensified in March, though some easing was visible in early April. Despite this partial improvement, the RBI said risks to growth remain tilted to the downside because uncertainty remains persistent. The central bank also cautioned that if supply disruptions linger, they could spill over into a broader demand shock.

Supply chain stress and the “supply shock” channel

The RBI highlighted supply-side risks as the immediate transmission mechanism. It warned that disruptions to global supply chains can hit availability and prices of critical inputs, affecting output across industry, agriculture, and services. The Bulletin explicitly flagged potential disruptions in energy, fertilisers, and commodity markets. These disruptions can raise costs, compress margins, and delay production and deliveries. The RBI also noted that disruptions to logistics networks may take time to normalise, keeping pressure on both growth and prices.

Oil, imported inflation, and the current account

A major concern flagged by the RBI is the inflationary impact of elevated crude oil prices. Higher crude can fuel imported inflation and widen the current account deficit by increasing the import bill. The minutes of the April monetary policy meeting reinforced this risk framing, with policymakers discussing how geopolitics could shift India’s growth-inflation trade-offs. External MPC member Nagesh Kumar said the current account deficit, which has stayed in a “comfortable range” of about 1.5% of GDP in the past, is likely to worsen due to weak global export growth and a higher crude import bill. The RBI also underscored that prolonged supply disruptions may morph into a demand shock over time.

Why RBI held rates steady and waited for clarity

The minutes of the April policy meeting show that downside risks to growth and upside risks to inflation were central to deliberations. Policymakers chose to “wait and watch” to avoid a policy misstep until there was more clarity on geopolitics, and voted for a status quo. On April 8, while announcing the status quo on the policy rate, Malhotra said supply chain disruptions may take longer to subside fully and restore the logistics network, posing downside risks to growth and upside risks to inflation. He also said the Indian economy is on a stronger footing than before to withstand these shocks. Malhotra added that inflation pressures could subside to manageable levels if there is a swift resolution, while fiscal and administrative measures are limiting the pass-through of higher crude prices.

Exports, freight costs, and the remittance link

The RBI and MPC members flagged external channels beyond oil. Malhotra said merchandise exports are likely to be affected by logistics disruptions and rising freight and insurance costs, although services exports and recent trade agreements are expected to provide support. Policymakers also flagged the risk from weaker global growth, which can reduce export demand and remittance flows. The April policy narrative listed multiple channels through which the conflict can impact India, including exports, supply of critical commodities, elevated energy and commodity prices, remittances, uncertainty, and subdued global demand. Bhattacharyya said the macroeconomic impact would depend on the conflict’s longevity and scale, and how quickly global supply chains normalise.

Growth outlook: RBI’s FY27 projection vs FY26

In the April policy, the RBI projected India’s real GDP growth for FY27 at 6.9%, lower than the 7.6% in FY26. The minutes noted that the geopolitical conflict could shift the growth-inflation trade-off away from a “Goldilocks” state observed in February. This framing matters for markets because it highlights the risk of a less favourable mix of growth and inflation outcomes. It also signals that the central bank is prioritising flexibility and monitoring incoming data and external developments.

Crisil: “largest energy shock” and a wider macro spillover

Crisil described the ongoing West Asia conflict as the “largest energy shock on record,” with risks extending beyond oil into gas supply, trade flows, logistics, and remittances. It said a prolonged conflict could shave up to 30 basis points off India’s FY27 growth. In its base case, Crisil pegged FY27 GDP growth at 7.1%, while a stress scenario could take it down to 6.8%. Crisil also expected the current account deficit to widen to 2% of GDP from 1.5% due to a higher import bill. It estimated inflation at 4.7% due to second-order energy cost effects, and projected the rupee could weaken to an average 92.5 per US dollar, while bond yields could harden to 6.9%.

EY: risk of a larger hit if disruptions persist

Ernst & Young’s ‘Economy Watch’ report warned that if the conflict’s impact persists through FY27, India’s real GDP growth could erode by around 1 percentage point from a baseline of 7%. It also estimated CPI inflation could rise by approximately 1.5 percentage points from a 4.0% baseline. EY highlighted India’s vulnerability because it imports nearly 90% of its crude oil requirements and is also dependent on imports of natural gas and fertilizers. It said the spillover could affect both supply and demand conditions and directly impact employment-intensive sectors such as textiles, paints, chemicals, fertilizers, cement, and tires. The report also flagged early signs of moderation in private sector activity and intensifying cost pressures.

Key numbers at a glance

Market impact: what the risk channels mean for India

The RBI’s assessment highlights a familiar shock pattern for India: higher energy costs, supply disruptions, and tighter external conditions can combine to weaken growth while pushing inflation higher. On the trade side, logistics rerouting and higher insurance costs can pressure merchandise exports, even if services exports provide some support. On the external balance side, higher crude prices can lift the import bill and widen the current account deficit, increasing sensitivity to capital flows and currency volatility. On the domestic side, higher input costs can strain margins and slow production, particularly in energy-intensive and employment-heavy sectors highlighted by EY. The RBI’s emphasis on uncertainty and volatility also matters for liquidity conditions, since financial market stress can affect consumption and investment decisions.

Why this story matters for policy and investors

For monetary policy, the key issue is the evolving growth-inflation trade-off as the shock transmits through oil, freight, and supply chain channels. The April minutes show policymakers are watching geopolitics closely before adjusting their stance, seeking to avoid a misstep in an uncertain environment. For investors, the important signals are in the forward indicators and external metrics discussed by the RBI, Crisil, and EY: crude and freight costs, export demand, remittance trends, the current account deficit trajectory, and evidence of cost pressures in business surveys. The RBI’s baseline still reflects resilience, but the institution’s language on downside growth risks and upside inflation risks indicates a wider distribution of outcomes.

Conclusion

The RBI’s April 2026 Bulletin and MPC minutes underline that the West Asia conflict has become a material macro risk for India through oil prices, supply chains, trade, and remittances. RBI has projected FY27 growth at 6.9%, while external assessments from Crisil and EY quantify potential hits to growth and inflation under prolonged disruption scenarios. The next phase will depend on whether logistics and energy markets stabilise, and how long global uncertainty keeps financial conditions volatile.