Prolonged West Asia war could push India’s inflation above 5%, economists warn

Crude could push inflation

• India's retail inflation may rise if West Asia conflict persists
• Oil over $100/barrel may drive CPI inflation past 5%
• Economists expect March inflation in the 3.2–3.5 percent range

Did our AI summary help?

India’s retail inflation may remain moderate in the near term but could rise sharply if the West Asia conflict persists and higher global energy prices begin to pass through to domestic consumers, economists said after February inflation edged up to 3.2 percent.

Economists expect March inflation to remain in the 3.2–3.5 percent range, but warn that energy prices, particularly cooking gas and crude oil, could begin exerting pressure in the coming months.

“If average crude prices remain at $100 per barrel or higher, CPI inflation could rise above 5 percent in FY27, compared with our base case of 4.3 percent,” said Rajani Sinha, Chief Economist at CareEdge, adding that the extent of inflationary pressure will depend on how long crude prices remain elevated. Oil marketing companies may absorb crude prices up to about $90 per barrel, but sustained levels above that could force a price pass-through to consumers.

Economists at QuantEco Research offered a similar assessment.

“If the Middle East war continues over the next 1-2 months, its fallout, while severe in the near term, could be managed through internal buffers and policy decisions such as excise duty cuts. However, under a worst-case scenario—characterised by a prolonged conflict, severe disruption to energy supplies and crude stabilising at $100 per barrel—we estimate CPI inflation could rise by around 100 basis points above our pre-war baseline estimate of about 4 percent,” said Shubhada Rao, founder of QuantEco Research.

Meanwhile, Nomura has raised its FY27 inflation forecast to 4.5 percent, citing the impact of LPG price hikes and indirect spillovers through transportation and service costs.

Energy prices remain the key risk. ICRA’s Aditi Nayar estimates that every 10 percent increase in crude oil prices could raise CPI inflation by 40-60 basis points if fuel costs are fully passed through to consumers.

Higher global commodity prices are already feeding into India’s inflation dynamics through imported inflation. SBI Research noted that imported inflation—accounting for 24.4 percent of the CPI basket—is currently running at 5.7 percent, well above headline inflation. Any disruption to shipping through the Strait of Hormuz could push up prices of crude oil, fertilisers and natural gas further.

Despite these risks, most economists believe India’s inflation position remains stronger than during previous energy shocks. Oxford Economics’ Alexandra Hermann noted that the current oil surge comes against a far more benign inflation backdrop than in 2022, when both food and core inflation were already elevated.

However, Hermann warned that a sharper oil shock could still change the policy outlook.

“In a more severe scenario, where global oil prices average around $140 per barrel for two months, monetary policy settings may tighten by June,” she said.

The Reserve Bank of India’s Monetary Policy Committee is scheduled to meet in April, where economists broadly expect the central bank to keep policy rates on hold while monitoring developments in global energy markets.