RBI MPC minutes reveal dilemma: War-driven oil spike, inflation risks tie policymakers’ hands

Heightened geopolitical tensions in West Asia and rising risks to inflation weighed heavily on the Reserve Bank of India’s rate-setting panel earlier this month, minutes of the April meeting showed on Wednesday.

The six-member Monetary Policy Committee (MPC), which met on April 6–8, flagged that the conflict has disrupted global supply chains, driven up energy prices and complicated the outlook for both growth and inflation in Asia’s third-largest economy.

The MPC voted unanimously to keep the benchmark repurchase rate at 5.25%, flagging heightened uncertainty after the West Asia conflict drove crude prices sharply higher, a weak rupee and disrupted trade flows.

The RBI's policy stance was retained at neutral.

“The economy is confronted with a supply shock… it is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” the MPC said in the minutes.

The panel, chaired by RBI Governor Sanjay Malhotra, highlighted that while domestic demand remains resilient, external headwinds have intensified, particularly through higher crude oil prices, volatile financial markets and pressure on the rupee.

India’s economic growth is projected at 6.9% for the 2026–27 fiscal year, down from an estimated 7.6% in 2025–26.

Inflation is expected to rise to 4.6% in 2026–27, still within the central bank’s tolerance band but facing upside risks from energy prices and possible weather-related disruptions such as El Niño.

Governor Malhotra said the central bank would remain “circumspect and vigilant”, closely monitoring incoming data and global developments before taking further action.

Malhotra opined that the West Asia conflict poses challenges to the Indian economy through a number of channels – exports, supply of critical commodities, elevated energy and other commodity prices, remittances, uncertainty, and subdued global demand.

Overall, geopolitical uncertainties have intensified, with the conflict widening its spread over the last month, he said.

As a result, supply chain disruptions, which may take longer to subside fully and restore the logistics network, pose downside risks to the growth and upside risks to inflation.

"As for monetary policy, this represents a supply shock. The underlying inflation pressures, minus the shock, are contained.

"If the conflict remains unresolved for a long duration, it can make the task of central banks arduous in their endeavour to rein in inflation expectations while minimising growth sacrifice," the minutes quoted Malhotra as saying.

Several MPC members noted that monetary policy has limited ability to counter supply-driven inflation.

External member Nagesh Kumar said India’s dependence on Middle East energy imports makes it vulnerable to disruptions, with the Strait of Hormuz crisis pushing crude prices sharply higher and likely worsening the current account deficit.

Another member, Saugata Bhattacharya, warned that uncertainty over global supply chains and rising short-term inflation expectations have materially altered the balance of risks.

“Arguments for increasing the policy rate in anticipation of higher inflation are as risky as cutting rates in response to a fear of lower growth,” he said.

Prof. Ram Singh said crude prices have surged more than 40% in recent weeks, shifting the growth-inflation trade-off and shaving up to 60 basis points off growth.

He noted that the turmoil in the Strait of Hormuz is a drag on growth directly through oil supply disruptions and their effect on demand. This, along with disruptions in key shipping lines, has dampened the growth prospects of the global economy and Indian exports.

“It is true that a dovish pause is not going to help on the external front, especially when the INR has been depreciating, and the Current Account Deficit (CAD) data has been generating mixed signals,” he said.

RBI Deputy Governor Poonam Gupta said inflation remains largely driven by supply factors and is expected to stay within target, supported by stable core inflation and strong domestic fundamentals.

Executive Director Indranil Bhattacharyya said that premature policy action could hurt output without significantly easing inflation, as long as inflation expectations remain anchored.