Oil prices, LPG hike may push inflation higher

After remaining below 4 per cent for thirteen consecutive months, retail inflation could witness upward pressure due to a combination of factors.

Headline CPI inflation inched up to 3.2 per cent in February from a revised 2.7 per cent in January. The uptick was almost entirely driven by the food and beverages segment, while core inflation remained unchanged at 3.4 per cent during the period.

Analysts expect year-on-year inflation in the food and beverages segment to ease marginally in March. However, the increase in domestic and commercial LPG cylinder prices in early March, triggered by global energy supply disruptions, is expected to exert upward pressure on inflation in the electricity, gas and other fuels category, as well as restaurant and accommodation services.

These factors, along with the continued rise in average prices of precious metals such as gold, could push headline CPI inflation to around 3.3–3.5 per cent in March.

Looking ahead, with a relatively lower weight for food and beverages in the new CPI series compared with the previous one, the expected base-effect-driven uptick in headline CPI in the next fiscal may be moderated after the initial rise. As a result, the inflation curve could remain relatively flat, even as the average inflation is likely to hover around 4 per cent in the base case for FY27.

However, ongoing geopolitical tensions in West Asia pose upside risks to the inflation trajectory if they persist for an extended period. According to analysis by ICRA, every 10 per cent increase in average crude oil prices could raise CPI inflation by about 40–60 basis points, assuming full transmission to retail auto fuel prices.

Elevated crude oil prices could also weigh on corporate profitability and household spending.

Heightened geopolitical uncertainty affecting growth and inflation outlook strengthens the case for a pause in the upcoming April Monetary Policy Committee (MPC) meeting.

Imported inflation is already elevated at 5.7 per cent in February due to exchange rate fluctuations and external shocks such as supply chain disruptions, and it may rise further.

Global weather forecasts also indicate the possible build-up of an El Niño pattern in 2026, which could affect agricultural output and food prices.

According to Ecowrap, the ongoing conflict has disrupted maritime trade and production, with limited storage capacity and crude inventories floating at sea. This has intensified speculation in commodity markets alongside genuine demand from various regions.

In such a scenario, clear communication and alternative energy security arrangements, along with rational curbs on energy usage where necessary, could help mitigate the broader economic consequences of the conflict.

A sustained rise in global crude oil prices could therefore pose a significant upside risk to domestic inflation.