RBI Bulletin Warns of Risks to Inflation from Second-Round Effects of West Asia Conflict

Last week, Reserve Bank of India Governor Sanjay Malhotra highlighted the possibility of inflation risks from second-round effects arising from the West Asia conflict. The minutes of the Monetary Policy Committee, released on Wednesday, showed that this was already being discussed within the rate-setting panel. The RBI’s April bulletin has now reinforced the same concern.

Possible second-round effects, with the supply shock from the West Asia conflict transforming into a demand shock, warrant careful and continuous assessment, the RBI bulletin said.

State of the Economy article in the RBI’s April Bulletin cautioned that the recent surge in energy prices due to the West Asia crisis has increased upside risks to the inflation outlook even as headline inflation remains contained within the target band.

The report notes that while headline inflation remains below the target, the balance of risks has turned adverse. The rise in global energy prices, driven by disruptions in West Asia, has added to inflationary pressures. At the same time, weather-related uncertainties pose risks to food prices, making the near-term inflation trajectory more uncertain.

As is standard practice, the Bulletin clarifies that the views expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India.

Core inflation pressures remain muted for now, indicating that underlying demand conditions are stable. Also, higher costs feeding into wages and prices more broadly can make inflation more persistent and complicate the policy response, it said.

While inflation remains contained in many economies, the recent increase in energy prices has raised upside risks, prompting central banks to remain cautious in adjusting monetary policy, it said. In

A major concern flagged in the article is the disruption to global supply chains. The near halt in tanker movements through the Strait of Hormuz has intensified supply pressures, affecting crude oil flows and other critical inputs. These disruptions have contributed to a renewed build-up of supply-side pressures, pushing up costs across sectors.

The commentary also underscores that the durability and intensity of the conflict remain uncertain, which clouds both global growth and inflation prospects, it said. Elevated energy prices, if prolonged, could translate into higher transportation and production costs, thereby exerting pressure on retail inflation over time, it added.

At the same time, the article notes that a temporary ceasefire between the US and Iran has provided some breather to the global economy. However, it cautions that the situation remains fluid, and risks could resurface if geopolitical tensions escalate again.