MUMBAI: Reserve Bank of India (RBI) Governor Sanjay Malhotra, commenting on the ongoing tensions in the Middle East, said, “We are, therefore, in a wait-and-watch mode now.”
“Moreover, we have been maintaining a neutral stance for the last few policy cycles. This preserves the flexibility to respond as inflation-growth dynamics evolve,” he said.
Governor Malhotra emphasized that in uncertain times, it is crucial to remain agile and avoid making firm commitments about the future path of policy. “In such circumstances, our approach has been to be even more data-dependent and to continuously reassess the balance of risks,” he noted.
He pointed out that the current crisis has significant implications for India, as West Asia accounts for about one-sixth of the country’s exports, one-fifth of imports, half of crude oil imports, two-fifths of fertiliser imports, and nearly two-fifths of inward remittances.
“The appropriate monetary policy response to such a supply shock is to look through the first-round effects, to the extent that they do not feed into second-round dynamics. These second-round effects are the real concern,” he explained. He added that prolonged supply chain disruptions could embed inflationary pressures into the general price level.
“Preventing this entrenchment is where monetary policy has a primary role to play—through its influence on inflation expectations rather than through blunt demand compression,” he said.
Reiterating the risks, the Governor said that second-round effects arise when inflation expectations increase due to sustained supply disruptions, making their containment critical.
He further clarified that the central bank’s intervention in the foreign exchange (forex) market has been as warranted and that it does not commit to an “indefensible peg.”
“India’s current account deficit is manageable and foreign currency exposure remains reasonable. For a country at India’s stage of development, the sequencing of capital account liberalisation is not a technicality—it is a first-order question of macroeconomic sovereignty,” he added.
Agencies