New Delhi [India], April 23 : The Reserve Bank of India's Monetary Policy Committee is willing to look through the current supply-driven inflation spike for now, but has flagged a possible policy tightening from the second half of FY27 if the Middle East conflict and El-Nino conditions prolong and push prices beyond food and fuel, according to an analysis of the latest MPC meeting minutes by ICICI Global Markets Research.
The minutes highlight a sharp shift in the growth-inflation balance following the Middle East conflict and the blockade of the Strait of Hormuz, a route that accounts for nearly half of India's energy imports. Members noted that the external account is also under pressure due to higher energy import costs, lower exports to GCC countries and potential capital outflows. The trade route disruption, combined with the likelihood of lower agricultural output from El-Nino, has created the risk of "lower growth with higher inflation," the minutes show according to the research report.
Despite the immediate price shock, most members agreed that the current inflationary pressure is largely supply-driven and therefore outside the MPC's direct control at this stage. Administrative controls on retail fuel prices and government intervention have helped contain the impact so far. RBI Governor and other members stressed that underlying inflation, excluding volatile components such as food, fuel and precious metals, remains benign. Core inflation is projected at 4.4%, and even lower when precious metals are excluded, the minutes note according to the research report.
However, the MPC warned that a prolonged conflict could lead to second-round effects, with supply-side shocks spilling over into the broader economy. Near-term household inflation expectations have already risen, according to member Saugata Bhattacharya. The committee has pencilled in FY27 CPI at 4.6%, while ICICI Global Markets expects it to average 4.5%, with upside risks if the conflict and El-Nino persist.
Th report noted that the members discussed a potential 50-60 basis point hit as energy constraints weigh on MSMEs and exports to GCC nations which account for 15% of merchandise exports and 38% of remittances come under pressure. El-Nino's impact on agriculture output adds to the downside. The revised MPC growth projection for FY27 stands at 6.9%, with a downward bias if supply constraints linger. The slowdown is already visible in March's manufacturing PMI, which fell to 53.9, its lowest since June 2022. ICICI Global Markets' FY27 GDP estimate aligns with the MPC, though it also sees downside risks from a protracted disruption.
For now, the committee is choosing to look past the shock, citing uncertainty over its duration. Future action will depend on incoming data on growth, inflation and the progress of the Southwest monsoon. Dr. Gupta noted that the new GDP and CPI series would provide less volatile and more accurate readings to guide policy.
The minutes also point to a de-facto tightening of financial conditions, with Saugata Bhattacharya stating that tighter global conditions are already acting as a brake on demand. While Prof. Singh cautioned that a dovish pause could hurt the external sector, he added that India's reliance on energy and critical imports needs structural solutions rather than monetary response. Dr. Kumar stressed the need to diversify both import and export markets to reduce vulnerability to supply shocks.
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