The MPC minutes noted that the conflict has triggered “severe disruption of global supply chains,” creating a difficult macroeconomic environment of higher prices and weaker global growth, complicating policy choices for central banks.
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Energy shock and supply disruptions weigh on growth
According to the MPC, elevated energy and commodity prices, along with supply shocks linked to disruptions in the Strait of Hormuz, are expected to act as a drag on domestic production in 2026-27.
RBI Governor Sanjay Malhotra said the conflict is affecting the Indian economy through multiple channels, including exports, supply of critical commodities, remittances, and heightened uncertainty.
Dr. Nagesh Kumar highlighted India’s dependence on crude oil, natural gas and fertiliser imports from the Middle East, noting that the Strait of Hormuz disruption has pushed crude prices sharply higher, with implications for inflation, the rupee and the current account deficit.
Prof. Ram Singh said the turmoil in the Strait is directly weighing on growth through oil supply disruptions and weakening demand, estimating that the conflict has reduced growth projections by about 50 to 60 basis points.
The MPC projected real GDP growth at 6.9 per cent for 2026-27, while cautioning that risks remain tilted to the downside depending on the duration and intensity of the conflict.
On the external front, the minutes said merchandise exports could be adversely impacted due to disruptions in key shipping routes and a rise in freight and insurance costs if the conflict persists. Remittances and capital flows could also face pressure amid global uncertainty.
Inflation risks rise amid volatile energy prices
The MPC said persistently elevated energy prices due to the conflict, along with possible El Niño conditions affecting the monsoon, pose upside risks to inflation.
Headline inflation is projected at 4.6 per cent for 2026-27, up from 2.1 per cent in the previous year, largely reflecting supply-side pressures.
Indranil Bhattacharyya, another MPC member, said disruptions in global logistics have made prices highly sensitive to geopolitical developments, with input cost pressures likely to feed into inflation over time.
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Shri Saugata Bhattacharya cautioned that energy prices may not return to pre-conflict levels soon, and persistent supply chain disruptions could amplify macroeconomic pressures.
At the same time, members noted that the inflation shock remains supply-driven. Dr. Poonam Gupta said underlying inflation pressures remain contained and inflation is expected to stay within the target band despite the rise.
Policy stance unchanged amid uncertainty
Given the uncertainty, all MPC members voted unanimously to keep the policy repo rate unchanged at 5.25 per cent and retain a neutral stance.
Members emphasised that monetary policy has limited ability to respond to supply shocks such as oil price spikes and should instead remain data dependent while monitoring the evolving situation.
The minutes said that while high frequency indicators point to continued strength in domestic activity driven by consumption and investment, the West Asia conflict is expected to weigh on growth through higher input costs, supply disruptions and financial market volatility.