Retail inflation quickened for the fourth successive month to 3.21 percent in February from 2.74 percent in January, with most of 47-basis-point rise driven by the food and beverages segment. During February, food inflation jumped to 3.47 percent from 2.13 percent in January, thanks mainly to the higher prices of vegetables, fruits and oils. Even though core inflation excluding food and fuel remained unchanged at 3.4 percent, rural households saw stronger price pressures with inflation printing at 3.37 percent, higher than the 3.02 percent seen in cities. The recent hike in cooking gas prices will exert further pressure on household budgets this month, while rising petrol prices may push transportation costs higher. In all, March inflation is expected to be upwards of 3.7 percent.
While the February print falls within the RBI’s 4 percent target, what’s concerning is its timing coinciding with rising geopolitical uncertainties. So far this fiscal, between April 2025 and February 2026, inflation averaged 1.9 percent, with crude oil prices averaging $70 a barrel. But with fuel prices pushed up by the West Asia war, crude may average $75-80 next fiscal, which means forecasts for headline inflation in 2026-27 can shoot past the RBI’s target. On top of this, the likelihood of heat waves this summer and a potential El Niño effect in the second half may adversely affect food prices next fiscal. For now, analysts see the inflationary effect of oil prices to be transitory and expect the RBI to respond with an accommodative liquidity stance to smoothen market volatility.
As for rate cuts in April, the chances have slimmed down even though the rising global crude prices are expected to have limited effect on headline inflation. Even if global oil prices average $140 a barrel for two months, as they did during the initial months of the Ukraine war in 2022, monetary policy may not move much. That is because the economy isn’t as vulnerable as it was in 2022, when elevated food and core price pressures pushed inflation closer to RBI’s upper tolerance limit of 6 percent. That said, if rising inflation in the short term forces the central bank to continue with its prolonged pause on interest rates, persistent price pressures next fiscal may compel it to turn hawkish and raise rates instead.