Second-round effects of the conflict in West Asia are the real concern, as what began as a supply shock can become embedded in the general price level, cautioned RBI Governor Sanjay Malhotra.
This statement comes in the backdrop of the global economy facing unprecedented challenges from heightened geopolitical tensions, the conflict in West Asia, and disruptions to global supply chains.
He observed that the appropriate monetary policy response to a supply shock is to look through the first-round effect to the extent that it does not feed into second-round dynamics.
“Second-round effects are the real concern. They can materialise if the supply chain disruptions continue for long. Then, what began as a supply shock can become embedded in the general price level,” Malhotra said in his recent address at Princeton University, USA.
So, 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.
“Coming to the present crisis, it particularly impacts us as West Asia contributes about one-sixth of our exports, one-fifth of our imports, half of our crude oil imports, two-fifths of our fertilisers imports and almost two-fifths of our inward remittances,” the Governor said.
He emphasised that in uncertain times such as these, it is important to be agile and nimble, maintain a broad policy stance, and avoid making firm commitments to the future path of policy.
In wait-and-watch mode now
“In such circumstances, our broad approach has been to be even more data dependent and to continuously reassess the balance of risks.
“We are, therefore, in wait and watch mode now. Moreover, we have been maintaining a neutral stance for the last few policy cycles. It preserves the flexibility to respond as the inflation-growth dynamics evolve,” Malhotra said.
Published on April 21, 2026