RBI MPC Warns Iran War May Drag Growth, Pushes Manufacturing Boost

On the external front, merchandise exports may be adversely impacted from disruptions to key shipping routes and the concomitant rise in freight and insurance costs in case the conflict is long-drawn. However, sustained momentum in the services sector, persisting impact of GST rationalisation, rising capacity utilisation in manufacturing, and healthy balance sheets of financial institutions and corporates should continue to support domestic demand, the minutes state.

RBI Governor Sanjay Malhotra said the conflict is affecting the Indian economy through multiple channels, including exports, supply of critical commodities, remittances, and heightened uncertainty.

At the same time, MPC members noted that the inflation shock remains supply-driven. Dr. Poonam Gupta said underlying inflation pressures remain contained and inflation is expected to stay within the target band despite the rise.

Saugata Bhattacharya cautioned that energy prices may not return to pre-conflict levels soon, and persistent supply chain disruptions could amplify macroeconomic pressures.

Food inflation, he noted, remains broadly comfortable, though weather-related disruptions linked to El Niño pose a potential risk. Core inflation is also expected to pick up gradually as input cost pressures transmit through the economy.

He emphasised that monetary policy has limited effectiveness in addressing supply-driven inflation in the near term and becomes relevant primarily when second-round effects, such as rising wages and unanchored inflation expectations, begin to emerge.

However, at present there is no clear evidence of such second-round effects.Their materialisation would depend on how prolonged and widespread the conflict becomes and its influence on inflation expectations, he added.

Dr. Nagesh Kumar highlighted India's dependence on crude oil, natural gas and fertiliser imports from the Middle East, noting that the Strait of Hormuz disruption has pushed crude prices sharply higher, with implications for inflation, the rupee and the current account deficit.

Prof. Ram Singh said the turmoil in the Strait is directly weighing on growth through oil supply disruptions and weakening demand, estimating that the conflict has reduced growth projections by about 50 to 60 basis points.

Indranil Bhattacharyya, another MPC member, said disruptions in global logistics have made prices highly sensitive to geopolitical developments, with input cost pressures likely to feed into inflation over time.

- IANS