RBI sees resilience despite West Asia crisis as it keeps repo rates steady

RBI Governor Sanjay Malhotra said the West Asia conflict has raised risks to growth and inflation via oil, trade, and supply chains, but government steps on supply chains and exports may limit the imp

The Reserve Bank of India (RBI), on Wednesday, warned that the ongoing West Asia conflict poses risks to growth and inflation, even as it kept the policy repo rate unchanged at 5.25 per cent, citing global uncertainty and rising energy prices.

 

In the first Monetary Policy Committee (MPC) meeting of financial year 20206-27 (FY27), Governor Sanjay Malhotra-led committee unanimously voted for an unchanged interest rate and a neutral stance.

 

In his address, Malhotra said the decision comes as geopolitical tensions, particularly in West Asia, have intensified risks to the global and domestic economic outlook.

 

The war between US-Israel and Iran, which began on February 28, intensified in March and early April before a temporary ceasefire was announced on Wednesday morning (IST). The conflict led to a near blockade around the Strait of Hormuz, a key oil route, which strained global supply chains and affected energy and commodity flows.

 

 

Despite the ceasefire, the RBI cautioned that uncertainty remains high and risks persist if tensions flare up again.

How the conflict is impacting the global economy

According to the RBI, the conflict has already triggered:

• Sharp rise in crude oil and energy prices
• Supply shortages in key industrial inputs
• Increased volatility in financial markets
• Flight to safe-haven assets like the US dollar
• Hardening of global bond yields and correction in equities

These developments have increased inflation fears and dampened global growth prospects.

Channels of impact on the Indian economy

The RBI Governor outlined five key ways through which the conflict could affect India:

 

1. Oil prices and inflation

 

“First and foremost, elevated crude oil prices could increase imported inflation and widen the current account deficit,” he said.

 

2. Supply chain disruptions

 

“Disruptions in energy markets, fertilisers and other commodities may adversely impact industry, agriculture and services, reducing domestic output,” said Governor Malhotra.

 

3. Financial market volatility

 

“Heightened uncertainty, increased risk aversion and safe haven demand could impact domestic liquidity conditions, economic activity, consumption and investment,” he said.

 

4. External demand slowdown

 

“Weaker global growth prospects may dampen external demand and reduce remittance flows,” said Governor Malhotra.

 

5. Cost of borrowing

 

“Finally, adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing…”

 

The RBI warned that an initial supply shock could evolve into a demand shock if disruptions persist.

Growth outlook: Resilient but under pressure

India’s economy remains relatively strong, with GDP growth estimated at 7.6 per cent for 2025-26. However, growth is projected to moderate to 6.9 per cent in 2026-27.

 

The RBI said:

• Strong consumption and investment continue to support growth
• Services and manufacturing remain resilient
• However, higher input costs and supply disruptions will weigh on output
• Exports may also suffer due to disrupted shipping routes and rising freight and insurance costs

Inflation outlook: Risks on the upside

While inflation has remained below target in recent months, the RBI flagged emerging risks:

• Energy price spikes due to the conflict
• Possible weather disruptions, including El Niño
• Supply-side pressures

The RBI noted that the government has taken steps to limit the economic fallout and these measures are expected to mitigate some of the adverse effects of the conflict.

 

Despite rising risks, the RBI emphasised that India is better positioned than in past crises due to:

• Strong macroeconomic fundamentals
• Healthy banking and corporate balance sheets
• Robust domestic demand
• Adequate foreign exchange reserves

However, with uncertainty elevated, the MPC chose a “wait-and-watch” approach, signalling it will act as needed based on evolving global and domestic conditions.

 

The RBI Governor, in his speech, highlighted that the West Asia conflict has added a new layer of uncertainty to India’s economic outlook, primarily through oil prices and trade disruptions. While India’s economy remains resilient, policymakers are staying cautious as global risks continue to evolve.