RBI Governor Sanjay Malhotra has confirmed that the central bank is vigilantly monitoring the economic fallout from the West Asia conflict, specifically assessing if supply shocks will escalate into a generalised price rise that necessitates a monetary policy response.
Key Points
- RBI Governor Sanjay Malhotra confirmed the central bank is closely watching if the West Asia conflict's supply shock causes a widespread price increase, which could trigger policy intervention.
- The RBI has maintained a neutral monetary policy stance since June 2025, allowing for flexibility in responding to economic data.
- The Monetary Policy Committee (MPC) kept the key policy rate unchanged in its February and April meetings this year, with the next meeting scheduled for June 3-5, 2026.
- The West Asia conflict has significantly impacted crude oil prices, rising from approximately $75/barrel to over $100/barrel due to the blocking of the Strait of Hormuz.
- India, importing 80 per cent of its oil, is particularly vulnerable to rising oil prices, which exacerbate its balance of payment deficit and contribute to rupee depreciation.
The Reserve Bank of India is keeping a close watch to see if the West Asia conflict-induced supply shock leads to a generalised price rise requiring a policy response, Governor Sanjay Malhotra said.
“We are keeping a close vigil on whether and when the supply shock can become embedded in the general price level that may warrant monetary policy action,” Malhotra had said during a panel discussion on May 12, organised by the Swiss National Bank (SNB) and the International Monetary Fund (IMF).
The RBI uploaded the transcript of the governor’s comments on its website on Monday.
RBI's Neutral Stance and Policy Outlook
Malhotra said the central bank has been maintaining a neutral stance since June 2025, which gives flexibility to remain nimble in approach and respond judiciously to incoming data and information.
After cutting the key policy rate by 125 basis points (bps) to 5.25 per cent between February and December last year, the six-member rate setting panel of the central bank maintained status quo in the February and April policy meeting this year.
The next policy meeting is scheduled for June 3-5, 2026.
“We have been transparent and communicated the conditions which will necessitate the tightening of monetary policy,” Malhotra said, referring to the April meeting of the monetary policy committee.
“Regarding the current energy shock, we have clearly articulated in our MPC resolution of April 2026 that the economy is confronted with a supply shock and it may be prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” he said.
Impact of West Asia Conflict on Oil Prices and India
The West Asia conflict resulted in the blocking of the Strait of Hormuz, a key shipping route which sees sizeable energy transportation.
This sent crude oil prices above the $100/barrel from around $75/barrel in the pre-war period.
The sharp rise in oil prices impacts India, which imports 80 per cent of its oil requirements.
The rupee has depreciated sharply since the start of the war, as high oil prices worsen the balance of payment position, which is heading for a third consecutive year of deficit.
RBI's Approach to Transitory Shocks and Inflation Targeting
Malhotra said the policy framework is flexible enough and provides for +/- 200 bps variation around the inflation target of 4 per cent to look through transitory shocks.
During a supply shock, RBI generally tries to "look through" the first-round impact, if it believes that it is transitory and will dissipate quickly, he said.
“However, if sustained increase in prices drive up wages, production and transportation costs (second round effects) and lead to generalisation of inflation pressures, the "look through" approach is no longer optimal, requiring tighter policy,” he said.
“In such circumstances, broad approach is to be even more data dependent and to continuously reassess the balance of risks. Whether to look through or not depends on the duration of inflation and whether it is generalised in the economy,” he said.
The sufficiently longer target horizon of three quarters (nine months) also gives due flexibility to address transmission challenges in an uncertain environment, the governor said.
According to the act, the failure of the monetary policy is when average inflation stays below or above the tolerance band for 2 per cent and 6 per cent, respectively, for three quarters.
Since the last 10 years that the flexible inflation targeting framework has been in place, only in 2022, the RBI failed to keep inflation within the target for three straight quarters.
Malhotra also said average inflation, after inflation targeting was introduced, has reduced by about two percentage points.
