RBI Flags Second-Round Inflation Risks from West Asia Conflict

The Reserve Bank of India has signalled a more defined approach to handling inflation risks arising from the West Asia shock, with Governor Sanjay Malhotra indicating that policy would respond not to the initial impact of supply disruptions, but to signs of persistence.

In remarks delivered at Princeton University, Malhotra said the appropriate response to a supply shock was to look through first-round effects “to the extent that it does not feed into second-round dynamics,” adding that second-round effects were the “real concern”.

He noted that prolonged disruptions could embed price pressures in the general level of inflation, requiring policy to act through its influence on inflation expectations.

The comments mark a shift in emphasis from recent policy communication, which had highlighted uncertainty and resilience while maintaining a wait-and-watch stance. By elevating second-round effects, the governor has outlined more clearly the conditions under which the central bank may need to respond.

India’s economy faces rising uncertainty from the conflict in West Asia, which affects trade, energy imports, fertiliser supplies and remittances. The RBI has previously flagged risks to both growth and inflation from these disruptions, while keeping its policy rate unchanged and retaining a neutral stance.

Malhotra’s remarks suggest that the central bank is prepared to tolerate near-term inflation pressures as long as they remain contained and do not spread more broadly across the economy. At the same time, the emphasis on inflation expectations points to a preference for managing price stability through signalling and credibility rather than immediate rate action.

“In uncertain times such as this, it is important to be agile and nimble,” Malhotra said, adding that the RBI would avoid making firm commitments on the future path of policy. He reiterated that the central bank remains data-dependent and would continue to reassess the balance of risks.

The RBI has maintained a neutral stance in recent policy cycles, which Malhotra said preserves flexibility to respond as inflation and growth dynamics evolve. The latest remarks reinforce that approach, suggesting that while the bar for policy action is being defined more clearly, the timing and direction of any move remain contingent on incoming data.