West Asia conflict prompted MPC status quo, flag external sector risks

RBI holds rates amid West Asia risks, as MPC flags inflation, supply shocks, and external pressures while maintaining a cautious growth outlook

The ongoing West Asia conflict weighed on the Monetary Policy Committee’s (MPC’s) deliberations at its April meeting, with members unanimously voting to keep the policy repo rate unchanged and retain a neutral stance amid heightened uncertainty.

 

Several members flagged risks to the external sector, citing concerns over a widening current account deficit, according to minutes of the MPC meet released on Wednesday. They also pointed to El Niño conditions as a potential inflation risk.

 

Reserve Bank of India (RBI) Governor Sanjay Malhotra said the conflict posed challenges to the Indian economy through multiple channels — exports, supplies of critical commodities, elevated energy and other commodity prices, remittances, and subdued global demand. Even so, he said the outlook for 2026-27 remained “cautiously positive”, with services, agriculture, and healthy balance sheets continuing to support growth.

 

 

“Private consumption and investment are expected to remain resilient, aided by improving rural demand, sustained public spending, and a pickup in private capex,” Malhotra said, adding that services exports and recent trade agreements were expected to provide support.

 

He cautioned that supply-chain disruptions — which may take time to fully subside — posed downside risks to growth and upside risks to inflation. “If the conflict remains unresolved for long, it can make the central banks’ task of reining in inflation expectations while minimising growth sacrifice arduous,” he said. With the announcement of a temporary ceasefire, he added, there was a possibility of an early resolution and normalisation of supply chains. “In such a situation, it is prudent to wait and watch.”

 

A two-week ceasefire — later seen as fragile — was announced on the morning of April 8, the day of the policy decision.

 

RBI Deputy Governor Poonam Gupta said central banks needed to continue to play a supportive role in meeting the productive requirements of the economy. “The future course of policy action ought to be data dependent.”

 

On the revised consumer price index (CPI) and gross domestic product (GDP) series, she said the updated series would yield more stable numbers, likely requiring less significant revisions in the GDP series, and “less volatile and more accurate inflation figures”.

 

Internal member Indranil Bhattacharyya noted that monetary policy has limited ability to counter the direct effects of a supply-induced inflation shock, and becomes operationally relevant “once second-round effects are apparent”. He said the pass-through of higher energy prices to domestic inflation had remained muted so far because retail fuel prices had not been raised, but warned that higher input costs could exert pressure on prices going forward.

 

External member Ram Singh cautioned the conflict could shift India’s growth-inflation tradeoff from a “Goldilocks” state (low inflation and high growth) in February 2026 to the opposite extreme. “There is a case for a dovish pause. The estimated growth cost of the West Asia conflict so far is estimated at 50-60 basis points, widening the output gap,” Singh said. He added that underlying inflation — core inflation excluding precious metals — suggested demand pressure in coming quarters would remain contained.

 

External member Saugata Bhattacharya said despite tentative indications of a cessation of hostilities and a possible easing of tight global financial conditions, uncertainty over persistent global supply-chain dislocations remained. On growth, he said high-frequency indicators for March suggested continued resilience, but “nowcast” metrics were beginning to show early signs of a slowdown. “On inflation, we note the preliminary forecasts by some private meteorological organisations on the likelihood of hotter summers and the likely onset of El Niño.” Inflation expectations are “more worrying”, Bhattacharya said, adding India’s balance of payments and trade were likely to be affected.

 

Another external member, Nagesh Kumar, also flagged a worsening external position. “With the weak global economy affecting the growth of exports and crude prices pushing the import bill, the current account deficit, which has stayed in the comfortable range of 1.5 per cent of GDP in the past, is likely to worsen,” Kumar said. Prudence requires a status quo on monetary policy, while keeping a close watch on West Asia developments, he added.