India’s central bank governor flagged persistent inflation risks from the Middle East conflict, warning that initial supply shocks could become embedded in the economy even as the IMF boosts India’s growth forecast to 6.5%.
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RBI Warns of Lasting Inflation as Middle East Conflict Risks 2% Global Growth
The governor of the Reserve Bank of India warned that the Middle East crisis could fuel persistent inflation if supply disruptions continue, signaling a significant risk for the nation’s economy which sources half of its crude oil from the region. The warning highlights a growing divergence between India’s resilient growth forecasts and the mounting pressures from global geopolitical turmoil.
“Second-round effects are the real concern,” Governor Sanjay Malhotra said in a speech at Princeton University on Saturday. “What began as a supply shock can become embedded in the general price level. Preventing this entrenchment is where monetary policy has a primary role to play.”
The conflict directly impacts India's energy security and trade, with the Middle East accounting for about one-sixth of its exports, one-fifth of imports, and a large share of fertilizer imports and remittances, according to the RBI. While India has so far avoided sharp fuel price hikes as state-run refiners absorbed losses, this may change as the conflict drags on. Oil prices, which had surged to $119 a barrel, have since retreated to around $90, but remain a key variable for the central bank’s inflation calculus.
The RBI has adopted a “wait and watch” mode, holding its policy rate steady in April to assess the fallout. Malhotra indicated that rates would likely remain on hold in the near to medium term, creating a potential growth-inflation paradox for policymakers to navigate. The central bank is focused on managing inflation expectations “rather than through blunt demand compression,” he said.
Global Headwinds and India's Resilience
The RBI’s cautious tone comes as international bodies sound the alarm on the global outlook. The International Monetary Fund (IMF) recently lowered its global growth forecast for 2026 to 3.1 percent, cautioning that a prolonged conflict could push it down to 2.5 percent or even 2.0 percent in a severely adverse scenario. Finance ministers from more than 10 countries, including the UK and Japan, issued a joint statement warning that the conflict’s impact on growth, inflation, and markets will persist even after a resolution.
Despite these headwinds, the IMF raised India’s GDP growth forecast to 6.5% for both fiscal years 2027 and 2028, citing strong momentum. SBI Research echoed this optimism, projecting growth between 6.8% and 7.1% in FY27. This resilience is attributed to strong domestic fundamentals, including a robust banking sector and a large consumer base that makes the economy less reliant on exports compared to other major economies.
Sector-Specific Pressures Mount
However, the strain is becoming visible in specific sectors. India’s consumer durables industry faced a challenging fourth quarter, with sales of air conditioners and other cooling products muted by unseasonal rains and rising input costs for commodities like copper, according to analysts at HDFC Securities. They forecast a 7 percent revenue growth for the sector but expect earnings to decline.
The automobile sector also faces challenges. C.S. Vigneshwar, President of the Federation of Automobile Dealers Associations (FADA), said a prolonged conflict would impact vehicle exports and the supply of crucial commodities like oil and aluminum. While India’s domestic auto market grew a strong 13 percent last year, providing a cushion, supply chain disruptions remain a key concern.
The uncertainty has also whipsawed commodity markets. Gold prices in India surged over 50% in the last year to hit a record of Rs 1,75,000 before falling 20 percent as the US dollar strengthened. While institutional forecasts from Goldman Sachs and UBS remain bullish on the precious metal for 2026, its trajectory remains tied to geopolitical developments and the US Federal Reserve's interest rate path.
As the conflict continues, the RBI remains in a data-dependent stance, balancing the need to anchor inflation while supporting one of the world's fastest-growing major economies through a period of significant global uncertainty.
This article is for informational purposes only and does not constitute investment advice.
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