Reserve Bank of India (RBI) Governor Sanjay Malhotra recently issued a cautionary statement regarding the potential economic fallout from the ongoing conflict in West Asia. Speaking at Princeton University, Malhotra highlighted the risk of "second-round effects" on inflation, emphasizing the need for a nimble and agile policy stance.
Malhotra explained that these second-round effects could materialize if supply chain disruptions persist over a longer period. What might initially begin as an isolated supply shock could then become deeply embedded in the general price level, posing a significant challenge to economic stability.
India is particularly susceptible to these impacts due to its strong economic ties with the West Asia region. The area accounts for approximately one-sixth of India’s total exports, one-fifth of its imports, half of its crude oil supply, and two-fifths of its fertilizer imports. Additionally, West Asia contributes two-fifths of India’s inward remittances, further underscoring the region's importance to the Indian economy.
In response to these uncertainties, the RBI's Monetary Policy Committee (MPC) opted to keep the policy repo rate unchanged at 5.25% during its April meeting. The central bank also maintained a "neutral" policy stance, which Malhotra noted preserves flexibility to react as inflation and growth dynamics evolve. The RBI will now rely even more heavily on data, continuously reassessing the balance of risks.
Malhotra reiterated the effectiveness of the RBI’s flexible inflation targeting (FIT) policy, which has successfully navigated various shocks, including the COVID-19 pandemic and the Ukraine conflict. Since its adoption, average headline inflation has decreased to 4.7% (September 2016-December 2025) from 7.4% (April 2012-August 2016), indicating better-anchored and less volatile inflation expectations.
While consumer price index (CPI)-based inflation hit a low of 0.25% in October 2025 and remains below the RBI’s 4% target, it is expected to rise. The RBI projects inflation at 4.6% for the financial year 2026-27, with quarterly figures anticipated to increase amid supply-related disruptions and a surge in oil prices stemming from geopolitical tensions.
Despite these challenges, Malhotra affirmed that India’s financial system remains healthy and resilient. He attributed this strength to a decade of reforms, including the implementation of the Insolvency and Bankruptcy Code in 2016, alignment of prudential norms with global standards, and governance reforms within public sector banks.
The Governor also highlighted the success of the Unified Payments Interface (UPI) and announced the RBI's development of a Unified Lending Interface (ULI). This new interface aims to provide lenders with instant digital access to data, allowing for rapid creditworthiness assessments for small farmers and business owners who traditionally face difficulties in accessing formal credit.