AA Edit | Mideast Crisis Enters Homes

The rise in retail inflation to 4.38 per cent in June 2026, an 18-month high but still within the RBI's comfort level, signals that the West Asian crisis has begun to enter households. Food inflation, which disproportionately affects the poor and middle class, has risen to 5.3 per cent.

While India has faced oil shocks before, the present challenge is more complicated because it is accompanied by a failed monsoon caused by El Nino and geopolitical uncertainty. This combination makes India — a country that has a largest population to feed and acutely dependent on imported oil — highly vulnerable among large economies.

India imports a large part of its oil requirement, and any prolonged disruption in supply routes or spike in crude prices can increase transport costs, fertiliser prices and import bill, widen the current account deficit and weaken the rupee.

The government and the Reserve Bank of India (RBI) must, therefore, respond before the situation becomes worse. Though the RBI's policy measures had stabilised the rupee in the last month, the recent escalation of hostilities in West Asia has triggered a new round of pressure on the rupee.

One of the monetary instruments available to the Reserve Bank to fight rising inflation and weakening rupee is increasing interest rate. A higher deposit rate attracts new funds, while a higher lending rate, in theory, will dampen inflationary expectations.

On the flipside, a higher lending rate will affect capital investments and economic growth adversely. As the inflation rise was called by supply side issues, the impact of higher interest rate on controlling it could be suboptimal. Therefore, fiscal policy, trade policy and diplomatic strategy must work together with monetary policy to ring-fence households and protect the economy. In the long-run, however, India needs to end its periodic oil-induced crisis by switching over greener alternatives.