India’s inflation trajectory is gradually shifting from recent lows toward moderate acceleration, driven by a combination of domestic normalization and rising external risks. After a period of subdued readings earlier in 2026, emerging pressures may constrain further monetary easing and keep policymakers cautious.

Retail inflation eased to 2.75 percent in January 2026 under the revised CPI series (base year 2024), rising from December’s 1.33 percent but remaining well below the 4 percent medium-term target of the Reserve Bank of India (RBI). Food inflation stood at a modest 2.13 percent year-on-year, supported by strong harvests and above-normal monsoon rains in 2025 that improved supply conditions through late 2025. Additionally, the revised CPI basket reduced the weight of food to 36.75 percent from 45.86 percent, dampening volatility in headline readings.

However, this benign phase reflects a favorable base effect that is now reversing. Robust sowing during the 2025 monsoon kept food prices contained through the second half of FY26 (ending March 2026), but tougher comparisons are likely to push food inflation toward 4–5 percent in FY27 (April 2026–March 2027), even assuming normal rainfall. This normalization alone could lift headline CPI meaningfully from FY26’s estimated 2.5 percent.

External risks further complicate the outlook. Escalating tensions between the United States and Iran since mid-February 2026 have pushed Brent crude prices toward $70 per barrel, reversing earlier expectations of a decline to $50–55 amid OPEC+ supply increases. As India imports roughly 90 percent of its crude requirements, a sustained $10 per barrel increase in Brent could add 20–30 basis points to CPI through higher fuel and transport costs. The Strait of Hormuz, which handles about 20 percent of global oil flows and 45–50 percent of India’s crude imports, has experienced heightened volatility following Iranian military drills. Any prolonged disruption could drive oil prices above $100 per barrel, sharply increasing India’s import bill and forcing reliance on costlier spot supplies.

Sectoral spillovers are significant. Airlines face margin pressure as aviation turbine fuel constitutes 40–50 percent of operating costs; a 10 percent rise in oil prices could reduce EBITDA by 5–7 percent. Refiners such as Indian Oil Corporation, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited confront elevated input costs without full retail price pass-through. Paints, chemicals, tyres, and logistics sectors also face higher raw material and diesel expenses, compressing margins unless pricing power offsets cost increases.

Currency dynamics add another layer of pressure. The USD/INR reached 91.07 on February 19, 2026, marking a 5.32 percent annual depreciation. A 5 percent further depreciation could add ₹8,000–10,000 crore to the oil import bill and widen the current account deficit by 0.3 percent of GDP, contributing an additional 20–30 basis points to inflation.

Against this backdrop, the RBI maintained the repo rate at 5.25 percent in February 2026 after cumulative 125 basis points of cuts in 2025, adopting a neutral stance. With FY27 CPI projected near 4.3 percent—within the 2–6 percent tolerance band—policy continuity appears likely. While inflation remains manageable, the interplay of food normalization, oil volatility, and currency weakness suggests limited room for further rate reductions in the near term.