Amid concerns over high energy prices and supply disruptions in the Strait of Hormuz affecting domestic production in 2026-27, the Government’s emphasis on boosting domestic manufacturing across strategic sectors, as per the RBI Monetary Policy Committee (MPC) minutes, is seen as beneficial for India’s growth trajectory. The minutes also highlight potential adverse impacts on merchandise exports due to disruptions in key shipping routes and increased freight costs, although the services sector’s momentum, GST rationalization effects, and healthy financial institutions are expected to support domestic demand.
RBI Governor Sanjay Malhotra noted the various ways the conflict is impacting the Indian economy, including exports, critical commodity supplies, remittances, and increased uncertainty. The MPC members observed that the current inflation shock is primarily supply-driven, with expectations that inflation will remain within the target range despite the rise.
While acknowledging that energy prices may not normalize soon post-conflict, Saugata Bhattacharya cautioned about potential macroeconomic pressures from prolonged supply chain disruptions. He mentioned that food inflation remains stable, but weather-related disruptions linked to El Niño could pose risks, and core inflation is anticipated to gradually increase due to rising input costs.
The members highlighted the limited effectiveness of monetary policy in addressing supply-driven inflation in the short term, emphasizing its relevance when second-round effects like rising wages and unanchored inflation expectations start to emerge. They noted that the materialization of these effects would depend on the conflict’s duration and impact on inflation expectations.
Dr. Nagesh Kumar pointed out India’s reliance on imports from the Middle East, especially crude oil, natural gas, and fertilizers, underscoring the impact of the Strait of Hormuz disruption on crude prices, inflation, the rupee, and the current account deficit. Prof. Ram Singh estimated a reduction in growth projections by 50 to 60 basis points due to the turmoil in the Strait affecting oil supply and demand. Indranil Bhattacharyya highlighted the sensitivity of prices to geopolitical developments amidst global logistics disruptions, with expectations of input cost pressures translating into inflation gradually.
