Rising crude oil prices and supply disruptions caused by the conflict in West Asia are beginning to affect India’s economy, prompting the Reserve Bank of India (RBI) to lower its growth forecast and raise its inflation outlook for the current financial year.
Explaining the central bank’s , on Friday warned that higher energy prices, increasing input costs and supply chain disruptions could weigh on economic activity and push inflation higher in the months ahead.
“The rise in prices of energy and other inputs coupled with supply disruptions is likely to weigh on economic activity,” Malhotra said while presenting the Monetary Policy Committee’s assessment of growth and inflation.
The comments underline how the conflict in West Asia has become the biggest concern for policymakers, replacing what had earlier been a relatively comfortable inflation outlook.
The RBI has reduced its GDP growth projection for the current financial year to 6.6%, down from the 6.9% forecast made earlier.
The central bank now expects growth of 6.6% in the first quarter, 6.3% in the second quarter, 6.5% in the third quarter and 6.8% in the final quarter of the year.
According to Malhotra, India’s economy has so far shown resilience despite the global shock.
He noted that manufacturing and services activity remains strong, private consumption continues to hold up and fixed investment has maintained momentum despite rising costs.
“Overall, the economic situation has broadly exhibited resilience and withstood the conflict spillovers although the impact of cost pressures is becoming visible,” he said.
However, the Governor cautioned that elevated energy prices and supply disruptions could gradually affect demand and business activity.
He also pointed to weak global demand and higher logistics costs as risks for merchandise exports.
A major reason for the RBI’s revised outlook is the sharp increase in crude oil prices.
Malhotra said the central bank had assumed average crude oil prices of around $85 per barrel during its previous policy review. That assumption is no longer valid.
“International crude oil prices, the Indian basket, have averaged around US$110 per barrel during the last two months,” he said.
“Indications are that the average oil prices for this year would be substantially higher than what were assumed during the last policy.”
Higher oil prices are a significant concern for India, which imports the bulk of its crude oil requirements.
A rise in crude prices increases fuel costs, raises transportation expenses and eventually feeds into the prices of goods and services across the economy.
Reflecting these pressures, the RBI has increased its inflation forecast for the current financial year.
The central bank now expects consumer price inflation to average 5.1% during the year.
Quarter-wise, inflation is projected at 4.2% in Q1, 5.1% in Q2, 5.9% in Q3 and 5.4% in Q4.
The RBI’s previous forecast was lower.
Malhotra noted that although retail inflation remained below the RBI’s 4% target range in March and April, price pressures are beginning to emerge.
The Governor said the pass-through of higher global crude oil prices to domestic fuel prices started in May.
“The partial pass-through of high global crude oil prices to domestic pump prices of petrol and diesel started in May,” he said.
The RBI also highlighted rising costs across several sectors of the economy.
According to Malhotra, prices of commercial LPG, industrial raw materials, chemicals, base metals, rubber and plastic products have all increased.
These higher input costs are expected to eventually reach consumers.
“These would exert upward pressure on CPI inflation in the coming months as firms pass on these higher input costs,” he said.
The RBI noted that wholesale price inflation has already begun reflecting these pressures.
Higher energy costs and rising input prices pushed wholesale inflation above 8% in April, according to the Governor.
Apart from global developments, the central bank is also closely monitoring weather-related risks.
Malhotra said the projected deficiency in the southwest monsoon could affect agricultural production and rural demand.
The RBI also flagged risks arising from the possible development of El Nino conditions.
However, the Governor said government initiatives related to crop diversification, water conservation and climate-resilient farming practices could help reduce the impact.
He also pointed out that adequate food grain stocks and satisfactory reservoir levels provide some comfort despite the uncertainty.
The RBI’s decision to keep the unchanged reflects the difficult position policymakers currently face.
On one hand, inflation risks have clearly increased because of higher fuel prices and supply disruptions.
On the other hand, raising interest rates could hurt economic growth at a time when businesses are already dealing with rising costs and uncertainty.
The central bank appears to have chosen a wait-and-watch approach, preferring to assess how the oil shock and geopolitical situation evolve before taking further action.
For now, the RBI’s message is clear: India’s economy remains resilient, but the conflict-driven rise in crude oil prices is becoming a growing challenge for both growth and inflation.