Inflation "four consecutive rises"! India's February CPI rises to 3.21%, policy space pressured under the shadow of the energy crisis

Due to the escalation of conflict in the Middle East and energy supply shocks, inflationary pressure in India continues to rise.

On March 12, data from India’s statistics department showed that the CPI in February increased by 3.21% year-on-year, higher than the previous value of 2.74% and market expectations, marking the fourth consecutive monthly rise. Meanwhile, Brent crude oil prices broke through $100 per barrel, and the Strait of Hormuz effectively entered a blockade, posing a direct energy threat to India, one of the world’s largest crude oil importers.

The rebound in inflation together with the oil price shock has further narrowed the monetary policy space for India’s central bank. Nomura stated in its report that rising oil prices are dampening rate cut expectations, and the policy rate is expected to remain unchanged. Bloomberg reported that India's central bank governor Sanjay Malhotra has signaled that rates will remain unchanged for a considerable period of time, and economists generally expect no change in policy stance in the near term.

Inflation continues to rise, food category as the driver

This release is the second CPI data after India adopted a new base year series. In February this year, India’s government adjusted the CPI base year from 2012 to 2024, citing major structural changes in consumption behavior, income levels, urbanization, service sector expansion, and digitalization.

According to subindex data, the food inflation rate in February increased by 3.47% year-on-year, higher than January’s 2.13%, making it the main factor driving the CPI rebound.

Although inflation has risen for four consecutive months, the current reading of 3.21% remains within the 2%-6% target range set by India’s Reserve Bank (RBI). At the monetary policy meeting on February 5, RBI predicted that the inflation rate will remain around 2.1% this fiscal year and believes that the outlook for food supply remains “optimistic.”

Strait of Hormuz blocked, India’s energy on alert

The impact of the Middle East situation on India's energy security is accelerating. The Indian government disclosed on Wednesday that about 30% of its current crude oil supply and 90% of LPG imports are transported via the Strait of Hormuz. As the Middle East situation escalates, shipping through this strait has been severely disrupted, and Brent crude prices have crossed $100 per barrel.

As LPG is the main cooking fuel for Indian households, there has not yet been a significant shortage in the civilian market, but prices have risen. According to CNBC, as supply is prioritized for civilian demand, hotels and restaurants using commercial LPG are facing pressure from supply contraction, with some businesses falling into bankruptcy.

Policy space narrows, growth narrative under challenge

Nomura pointed out in its report that the “Goldilocks narrative” under India's new statistical series, where strong growth coexists with low inflation, is facing real challenges from rising oil prices and fuel shortages.

According to Bloomberg, before the Middle East crisis broke out, India’s central bank (RBI) predicted that inflation would remain near the 4% target around September. Analysts believe that rising energy costs will further push up inflation and could drag down economic growth that relies on imports.

Experts state that although current inflation remains within the RBI’s target range and is not sufficient on its own to trigger policy adjustments, developments in the Middle East will be the key variable determining the central bank’s next moves. If the crisis is prolonged, the policy path may have to be reassessed.

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