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RBI's Careful Watch on Inflation
The Reserve Bank of India is closely observing whether the escalating conflict in West Asia will lead to a broad increase in prices, Governor Sanjay Malhotra stated. He expressed concern that supply shocks stemming from the war could become embedded in the general price level, potentially requiring a shift in monetary policy. The central bank has maintained a neutral stance since June 2025, providing it flexibility to adapt its approach based on economic data.
Impact of War on India's Economy
The conflict has significantly disrupted global energy markets, pushing crude oil prices above $100 a barrel from around $75. This is a considerable challenge for India, which imports 80% of its oil needs. The surge in oil costs not only widens India's balance of payments deficit but has also contributed to a notable weakening of the rupee since the war began. The RBI's policy framework allows for fluctuations around its 4% inflation target to absorb such temporary shocks.
Flexible Approach to Inflation Targeting
India's flexible inflation targeting framework aims for an average of 4% inflation, with a band of 2% to 6%. This approach is designed to offer room to manage economic shifts. Governor Malhotra highlighted that this system has helped reduce average inflation by about 2 percentage points over the last decade. He noted that inflation only stayed outside the target for three consecutive quarters once, in 2022. The Reserve Bank of India's next Monetary Policy Committee meeting is scheduled for June 3-5, 2026.