West Asia crisis: RBI details India exposure in 2026

Why the RBI is flagging West Asia risks now

The Reserve Bank of India (RBI) has outlined how the ongoing crisis in West Asia could transmit into India’s economy through multiple channels, even as it reiterated the resilience of domestic fundamentals. RBI Governor Sanjay Malhotra said the region has a large weight in India’s external sector linkages and therefore matters for inflation, trade balances, and growth. The assessment comes amid concerns that energy supply disruptions and shipping risks, including at the Strait of Hormuz, can raise input costs and weaken external demand. Malhotra also warned that what starts as a supply shock can become persistent inflation if disruptions last long enough. He framed monetary policy’s role as preventing “second-round effects” from getting embedded in inflation expectations.

India’s direct exposure to West Asia: trade, oil and remittances

Malhotra said West Asia contributes about one-sixth of India’s exports and one-fifth of its imports, making the region important both for demand and supply. He added that the region accounts for half of India’s crude oil imports, highlighting the sensitivity of India’s import bill to crude price swings or logistical disruptions. West Asia also contributes two-fifths of India’s fertiliser imports, a key input for agriculture and food supply. Another critical channel is inward remittances, with the region accounting for almost two-fifths of these flows. Together, these links mean disruptions can show up across inflation, the current account, and household incomes.

Energy supply disruptions and the Strait of Hormuz risk

After the Monetary Policy Committee (MPC) meeting, Malhotra said elevated energy and commodity prices, along with disruptions in the Strait of Hormuz, are likely to impact growth in 2026-27. He said risks to the baseline projections are tilted to the downside, with uncertainty remaining elevated due to the ongoing West Asia conflict. The RBI flagged that any disruption to a critical energy chokepoint like the Strait of Hormuz can push crude prices higher, increasing India’s import bill and feeding into inflation. Higher energy costs can also transmit through transport, industrial inputs, and fertilisers, tightening overall cost conditions for businesses.

What the RBI said about oil availability and gas rationing

Malhotra said India is increasing domestic production of oil and gas as a response to the crisis and is diversifying sources of imports. He added there is no shortage of oil, citing reserves maintained by India. But he noted there is some rationing of gas for industrial purposes, indicating tighter conditions in parts of the energy supply chain. On pricing, Malhotra said oil marketing companies and the government have absorbed some of the price pressures in oil. He also said part of the pressure on gas prices has been passed on to consumers.

Inflation risk: why “second-round effects” matter

The RBI governor said second-round effects are the real concern if supply chain disruptions continue for long. He said a supply shock can become embedded in the general price level, which raises the risk of inflation persistence. Malhotra added that preventing such entrenchment is where monetary policy has a primary role to play. He described this role as acting through the influence on inflation expectations rather than “blunt demand compression.”

Trade flows and logistics: pressure on exports and costs

The RBI’s assessment noted that merchandise exports face a dual challenge of weak external demand and rising logistical costs. Early-year data cited in the context indicated a slight contraction in exports of around 0.2% year-on-year. Merchandise imports, meanwhile, were reported to have recorded 22.2% growth, largely driven by higher gold imports, widening the trade deficit. The central bank also highlighted that disruptions to major shipping routes linked to conflict zones have increased freight and insurance costs. These costs can reduce export competitiveness and compress margins for exporters, especially in labour- and cost-sensitive sectors.

Remittances: a stabiliser, but not immune to prolonged stress

Malhotra underscored the role of remittances in India’s external account, given the scale of inflows linked to West Asia. He also cautioned that weaker global growth prospects may dampen external demand and reduce remittance flows. This matters because remittances and services exports help offset merchandise trade deficits and can keep the current account deficit within sustainable limits. The RBI’s messaging suggests the key risk is not only immediate disruption, but also the impact of prolonged uncertainty on jobs and incomes in host economies.

Capital flows and financial conditions under tighter global risk appetite

The RBI noted that global financial conditions have tightened in response to the conflict, with sovereign bond yields hardening across major economies. Malhotra also warned that heightened uncertainty and increased risk aversion could impact domestic liquidity conditions. For investors, these channels matter because they can influence funding costs, market volatility and currency sentiment, even if domestic growth remains supported by internal demand. The RBI said it remains vigilant and is closely monitoring global energy markets, trade flows, financial conditions and other risks.

Growth backdrop: strong decade, but external shocks can bite

In a speech delivered at Princeton University on April 18, 2026, Malhotra said the Indian economy has demonstrated resilient growth over the past decade. He pointed to India’s average growth of 6.1% annually over the last decade, compared to 3.2% for the global economy. Separately, the RBI has projected real GDP growth at 6.9% for FY27, while highlighting rising external risks. The policy messaging signals a balancing act: acknowledging domestic momentum while mapping external vulnerabilities that could influence inflation and the current account.

Key numbers at a glance

Timeline of RBI communication

What investors and businesses will track next

The RBI’s framework suggests that crude prices, gas availability, freight and insurance costs, and export demand will remain key indicators of how the West Asia crisis transmits to India. The central bank’s emphasis on second-round effects implies close monitoring of inflation expectations and price pass-through in energy-linked items. For sectors, the discussion points to sensitivity in industries with high energy intensity, fertiliser-linked costs, and export exposure to logistics disruptions. The RBI has not provided a new stress scenario in the cited material, but it has been explicit that uncertainty remains elevated.

Conclusion

RBI Governor Sanjay Malhotra has mapped India’s exposure to West Asia across crude oil, trade, fertiliser imports and remittances, while warning that prolonged disruptions could harden inflation through second-round effects. India is responding by raising domestic oil and gas production, diversifying import sources, and relying on reserves to avoid oil shortages, even as gas is being rationed for industrial use. With the repo rate maintained at 5.25% and FY27 growth projected at 6.9%, the RBI’s focus is on keeping inflation expectations anchored while monitoring global energy and shipping risks, including the Strait of Hormuz.