The Reserve Bank of India has cautioned around the ongoing US-Iran war and its impact on the Indian economy, stating that it will adversely affect growth going ahead and push inflation upwards.
"Higher input costs associated with increase in energy prices and international freight and insurance costs along with supply-chain disruptions could constrain availability of key inputs for downstream sectors, thus impairing growth," according the minutes of the RBI's Monetary Policy Committee meeting released on Wednesday.
Along with this, elevated energy and other commodity prices coupled with supply shock due to disruptions in the Strait of Hormuz would act as a drag on domestic production in 2026-27, the RBI stated. The central bank added that amid the Iran war, it would be prudent to wait and watch before taking decisive action.
As far as supply shocks are concerned, another cloud hanging over the Indian economy is the potential disruption caused by weather phenomenon El Niño, which could have a negative impact on Southwest Monsoon.
"Weather-related events - El Niño disturbances - pose downside risks to the domestic growth outlook, and an upside risk for the inflation trajectory," MPC member Ram Singh said.
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El Niño is a natural climate phenomenon which occurs every two to seven years and is characterised by higher-than-average temperatures in central and eastern tropical Pacific Ocean. This impacts the Southwest Monsoon, leading to reduced rainfall during the June-September period in India. Generally, rainfall dependent sectors of the economy such as agriculture become more vulnerable in such conditions.
While the El Niño is expected to hit the agriculture sector the hardest, the Gulf conflict has affected the Indian economy through several channels.
Considering the global and climate cues, the RBI revised its consumer price index-based inflation outlook upwards to 4.6% for FY27. At the same time, the central bank also pointed out that it maintains a cautiously positive outlook for India's growth in the financial year.
The RBI underscored that while the direction of impacts of the West Asia conflict and El Niño disturbances on growth and inflation is clear, how long they last will determine the quantum of said impact.
MPC Keeps Rates Unchanged
The RBI on April 8 kept interest rates unchanged and reaffirmed its neutral policy stance, while signalling confidence in the country's growth momentum even as it warned of rising global risks to inflation, liquidity and financial stability.
The MPC unanimously voted to retain the repo rate at 5.25%, in line with market expectations. The Standing Deposit Facility (SDF) rate remains at 5%, while the Marginal Standing Facility (MSF) rate was kept unchanged at 5.5%.
ALSO READ: RBI MPC Key Highlights: Rates, Stance Unchanged But A Warning On Inflation
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