All six members of the RBI’s rate-setting panel flagged the issue of the economy being confronted with a supply-driven external shock arising from the conflict in West Asia and related geopolitical repercussions for continuing with a pause on the policy repo rate, according to the minutes of the panel’s recent meeting.

The six members of the monetary policy committee (MPC) voted unanimously on April 8 to keep the repo rate (the interest rate at which RBI provides short-term liquidity to banks to overcome liquidity mismatches) unchanged at 5.25 per cent. The MPC also decided to continue with the neutral stance.

In its February 2026 meeting too, the MPC kept this rate unchanged. It last cut the repo rate from 5.50 per cent to 5.25 per cent in its December 2025 meeting.

Cautiously positive

RBI Governor Sanjay Malhotra, in his statement to the MPC, observed 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, subdued global demand, etc.

He emphasised that despite these challenges, the outlook for 2026-27 remains cautiously positive with services, agriculture, and healthy balance sheets continuing to support growth.

“Overall, geopolitical uncertainties have intensified with the (West Asia) conflict widening its spread over the last month. As a result, supply chain disruptions, that may take longer to subside fully and restore the logistics network, pose downside risks to growth and upside risks to inflation.

“Nevertheless, the Indian economy is on a much stronger footing at the current juncture than at any time before to withstand these shocks,” he said.

As for monetary policy, Malhotra noted that 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

“With the announcement of the temporary ceasefire, however, there is a possibility of an early resolution of the conflict and normalisation of supply chains. In such a situation, it is prudent to wait and watch, before making any decisive move,” he said.

Conducive role

Poonam Gupta, Deputy Governor of the RBI, opined that under the circumstances (when global uncertainty has risen from already high levels; the external shock is supply driven; inflation, albeit expected to increase, is likely to remain close to the target; and growth is expected to be subdued), central banks need to continue to play a conducive role in supporting the productive requirements of the economy.

Constant vigil is warranted while waiting to ascertain the persistence of the supply shock, if any, she added.

supply shock

Indranil Bhattacharyya, Executive Director, said due to the conflict, monetary policy is confronted with a supply shock that poses upside risks to inflation and downside risks to growth.

“Monetary policy has limited ability to quell the direct effects of a supply-induced inflation shock; it only has operational relevance once second-round effects are apparent,” he said.

Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi, noted that with the combined effect of rising crude prices, exchange rate movements, possible effect of input costs on food prices, among others, the headline inflation is projected to rise to 4.6 per cent in FY27 from a very benign level of 2.1 per cent in FY26.

“The dramatic rise in inflation, however, is clearly resulting from a supply shock and not a demand-push one. In the current highly uncertain economic environment, prudence requires a status quo on monetary policy action,” he said.

Saugata Bhattacharya, Economist, emphasised that monetary policy cannot influence energy prices but can facilitate the process of economic adjustment in a way that sustainably achieves inflation targets.

“For me, the risks of a policy mistake have heightened amidst this uncertainty. 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. Quantifying the glide path along a precise timeline is not an exact science,” he said.

Bhattacharya underscored that the challenge is to determine the extent of the shocks being transitory versus persistently percolating through the economy, and the time expected for both inflation and growth to revert to targets

“I am also guided by domestic financial conditions having tightened significantly, which amounts to a de facto policy tightening. Hence, a status quo at this time is likely to have the lowest cost,” he said.

Ram Singh, Director, Delhi School of Economics, cautioned that the West Asia conflict could likely shift the Indian growth-inflation trade-offs from a Goldilocks state (low inflation and high growth) in February 2026 to the opposite extreme.

He noted that the Growth-Inflation-Risk triad - balancing economic growth, controlling inflationary pressures, while managing the associated risks – presents an unusual challenge for the Indian economy.

Singh assessed that the estimated growth cost of the West Asia conflict so far is estimated to be about 50-60 basis points, widening the output gap.

He said the underlying inflation, core inflation excluding precious metals, suggests that demand pressure in the coming quarters is expected to remain contained.

On the other hand, high input costs driven by energy spikes and supply-side disruptions have disproportionately affected the MSME sector, which lacks the working capital bandwidth to tide over these shocks.

A dovish pause in the repo rate, along with adequate fiscal measures, can help these firms deal with the shock, Singh added.

“To maintain enough elbow room to move the repo rate in either direction should we end up with an unexpected situation. Therefore, I change my stand on the monetary policy stance from ‘accommodative’ to ‘neutral’,” he said.

Published on April 22, 2026