Middle East conflict poses near-term challenges to Indian economy: RBI MPC member

Mumbai (PTI): Conflict in the Middle East poses some immediate-term challenges for the Indian economy but is unlikely to dent long-term economic growth momentum, an external member of the RBI's rate-setting panel has said.

Going forward, there is a need for fiscal and monetary policies to work in a coordinated manner to push GDP growth to a higher trajectory, Nagesh Kumar has said.

In the present scenario, a hike in oil prices, exports disruptions and impact on remittances have been identified as the immediate challenges on the growth front, he said.

"The breakout of the Middle East conflict poses some immediate-term challenges for the Indian economy by raising oil prices, disrupting exports destined to the region and the potential loss of remittances, besides threatening security of the Indian diaspora in the region," Kumar told PTI in an e-mailed interview.

In the immediate short run, he noted, the conflict is escalating with US-Israel strikes and oil prices are likely to harden.

"Hopefully, the crisis will be resolved soon, given the high stakes that the world has in the region," he said.

Kumar added that diversification of oil sourcing could help mitigate risks.

"The opening up of Venezuelan oil supplies for India is also likely to be helpful, as it diversifies the options," he said, adding that in the event the Middle East crisis ends quickly and sanctions on Iran are lifted, India may gain from cheaper oil supplies.

Despite geopolitical tensions, Kumar maintained that the inflation outlook remains benign. Headline CPI stood at 1.3 per cent in December 2025 and is projected to be around 2.5 per cent in FY2026, even under the new data series.

"The inflation outlook is not showing any concerns of overheating," he said.

He said that together with a brightening growth outlook, the benign inflationary trend provides an opportunity for India to stay in the "Goldilocks" zone for longer, barring immediate-term challenges posed by the conflict.

"The upshot of these trends, namely brightening economic growth outlook amid a continued benign inflationary trend, provides an opportunity for India to stay in the 'goldilocks' zone for longer, except for the challenges posed by the conflicts in the immediate-term," Kumar said.

He emphasised that India has a real opportunity to move to a higher trajectory of growth from around 7 per cent to around 8 per cent, underpinned by an accelerating manufacturing sector alongside service sector dynamism.

"Going forward, fiscal and monetary policies should work in a coordinated manner to support the transition of the economy to a higher GDP growth trajectory. It is this higher growth trajectory underpinned by a robust manufacturing sector that will be needed for the creation of adequate decent job opportunities and durable prosperity," he said.