RBI Flags Second-Round Inflation Risks If West Asia Conflict Persists

The Reserve Bank of India (RBI) has indicated that prolonged geopolitical tensions in West Asia could pose second-round risks to inflation, while maintaining a wait-and-watch approach on policy, Deputy Governor Poonam Gupta said in an interview published on April 24.

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The central bank stated that there is currently no evidence of second-round effects impacting inflation expectations, according to the interview.

Base-Case Assumption On Conflict Duration

The RBI’s base-case assumption is that the ongoing conflict will be resolved within a few months, followed by restoration of supply chains and normalisation of demand and supply conditions.

RBI mentioned that there could be risks of higher inflation if the disruption continues for a longer time and affects global commodity prices and logistics.

Inflation Targeting Framework And Policy

It was stressed by the RBI that India’s inflation targeting framework, which has an upper/lower limit of 4% ± 2%, would provide sufficient room for dealing with supply shocks.

The central bank has kept the benchmark repo rate unchanged at 5.25% in its April 6–8 policy meeting, marking the second consecutive pause, according to RBI data.

It added that coordination between monetary and fiscal policies has supported the effectiveness of inflation management in recent periods.

External And Domestic Factors

The RBI stated that global developments, including the West Asia conflict, remain a key factor influencing inflation outlook through their impact on energy prices and supply chains.

At the same time, the central bank noted that El Niño conditions are unlikely to significantly affect agricultural output, as per its current assessment.

Economic Outlook

As per the assumption of the RBI, shocks had already happened at the beginning of the current fiscal year and may lead to stability after that.

The RBI keeps a track on both the international and domestic economy, which includes factors like prices of commodities and geopolitics, and tries to assess their implications for inflation and growth.