Rising crude oil prices warrants careful observation from RBI on inflation

Reserve Bank of India

Recent uptick in crude oil prices in the international market due to ongoing conflict between Israel and Iran warrants for an careful observation by the Reserve Bank of India (RBI) in coming days on the inflation front because even though Brent crude oil prices have risen around $4-5 per barrel since escalation last week, but since May it has gone up around 15 percent.

Rajani Sinha, Chief Economist at CareEdge, said that Brent crude oil prices have surged, up approximately 16% since the end of May, amid renewed geopolitical tensions in the Middle East. These developments warrant careful observation, as they pose potential risks to global commodity markets and supply chains.

Usually, as per economists, an increase of $10 per barrel in crude oil prices leads to about a 0.4-0.6% increase in inflation. Barclays, in a report, said that the sharp ~USD10/barrel increase in crude oil prices since the escalation in Iran-Israel conflict over the past week, if it continues, would put further upside pressure on prices in June.

According to the Bloomberg data, Brent crude oil prices have surged $69 per barrel last week when the tensions in the Middle East escalated, from $74 per barrel today. While the Brent crude oil prices in May were trading at $65.41 per barrel.

However, economists believe that the current stability in the crude oil prices may ease the concerns on the inflation front.

“The uptick in crude prices appears to be a knee-jerk reaction to the conflict in the Middle East. It seems likely that the situation would de-escalate in a gradual manner, which implies that we can expect crude prices to return to the levels before the tensions flared. Hence, the impact on CPI is not likely to be significant,” said Aditi Gupta, Economist at Bank of Baroda.

Israel started attacks on Iran on Friday, targeting nuclear facilities and missile factories and killing military leaders.

Iran on Sunday launched a new wave of attacks on Israel, state television reported, as an intense exchange of fire raged between the two sides for a third day.

The official IRNA news agency also announced the beginning of "a new wave of missiles" launched towards Israel.

Meanwhile, the Israeli military said citizens could leave shelters after being told to take cover during a fresh barrage of Iranian missile attacks on Sunday.

In the last few months, India’s retail inflation stayed below the Reserve Bank of India’s (RBI) medium-term target of 4 percent. India’s retail inflation eased to a 75-month low of 2.82 percent in May, compared with 3.2 percent in April, as food inflation eased below 1 percent for the first time in nearly four years.

This was the fourth consecutive month that headline inflation has remained below the medium-term target. Food inflation, which has a significant weight in the consumer price index, has stayed below 3 percent for three consecutive months.

The RBI, in its monetary policy review on June 6, further lowered its inflation forecast for FY26 to 3.7 percent from 4 percent estimated earlier.

In the June monetary policy, CPI projections for FY26 were revised down by 30 basis points (Bps), Q1FY26 projections were revised down by 70 bps, Q2FY26 revised down by 50 bps.

The RBI has reduced its CPI inflation projection to 3.7 percent from its earlier projection of 4 percent for FY26. The projections given by the RBI on CPI inflation suggest that the inflation will remain lower than the medium-term target of 4 percent for a longer period.

Economists also said that due to the recent surge in crude oil prices, the central bank will remain watchful of the evolving situation. Moderation in food prices gives the RBI a significant headroom to adopt a wait-and-watch approach.