- Supply shocks, such as energy or food crises, are not new
- Central banks across the world have historically adjusted interest rates to slow down inflation
- At present, the interest rate in India is already at an elevated level in comparison to other countries
Supply shocks such as energy or food crises are not new. The Iran war, especially the blockade of the Suez Canal, has once again brought to the fore a situation of supply shock. Central banks across the world have historically adjusted interest rates to slow down inflation from reaching deeper into the economy. The Reserve Bank of India is slated to announce the policy rates on June 5, but will it increase the rates to delay the imported inflation from seeping into the economy?
"Monetary policy is the ideal tool to manage the domestic wedge. By controlling the domestic interest rate, the central bank directly influences the intertemporal trade-off for households, allowing it to stabilise domestic consumption and close the gap caused by sticky prices," according to an IMF Working Paper titled 'Optimal Exchange Rate Policy with Oil Shocks' released in February 2026.
Interest Rates Hike Due To Russia-Ukraine War
Four years before the Iran war started, the Russia-Ukraine war had introduced a similar situation of commodity shock. In response, the central banks of several countries had hiked their interest rates.
Between January and December 2022, interest rates in Australia rose from 0.1 per cent to 3.1 per cent, Brazil from 9.25 per cent to 13.75 per cent, the Euro area from zero per cent to 2.5 per cent, the US from 0.125 per cent to 4.375 per cent and in India, it rose from four per cent to 6.25 per cent, according to the Bank for International Settlements.
Current Interest Rates Across Countries
While raising interest rates is one of the tools the country and its central bank use to offset the high price, it doesn't alone contain the crisis. Also, raising interest rates too much hampers economic growth as consumption declines. At present, the interest rate in India is already at an elevated level in comparison to other countries.
Interest rates as of the end of April were 14.5 per cent in Brazil, 6.75 per cent in Mexico and 5.25 per cent in India. Rates in China, South Korea and the Euro Area are three per cent or below.
India's Interest Rate
By definition, raising interest rates delays inflation from seeping into the economy, but this is not a straightforward way.
"Supply shocks pose a challenge: pre-emptive and sharp policy tightening, if the shock is temporary, can exacerbate loss of output (growth foregone), while delaying the same can lead to unhinging of inflation expectations, making it difficult to rein in inflation," RBI said in its May 2026 bulletin.
The sufficiently wide tolerance band of +/- two per cent around the inflation target of four per cent provides the necessary policy space to accommodate supply shock-induced volatility in the short run, while maintaining focus on the medium-term objective of price stability, it added.
India's interest rate came down from 6.5 per cent in January 2025 to 5.25 per cent in December 2025. The rates have remained the same since then.
Experts believe that the RBI will still hold the interest rate in its upcoming MPC meeting.
"We expect the MPC to hold rates steady this week, while signalling readiness to respond should inflation risks intensify, and second-round pressures begin to emerge. While the percolation of the energy shock to the real sector is still unfolding, the RBI is likely to flag a cloudy Brent outlook amid a large drawdown in energy inventories and lingering geopolitical risks," said Madhavi Arora, Chief Economist, Emkay Global.
This, in conjunction with the rising risk of El Nino, could lead the RBI to raise its FY27 inflation forecast, while adding downside risks to growth, she added.
