Retail inflation rises to 3.4% in March; RBI assessment holds, say analysts

The impact of the West Asian war on the Consumer Price Index (CPI) was moderate, as oil companies refrained from hiking auto fuel prices due to strong refining margins and excise cuts by the government. However, the index may increase over the coming months.

Even with an early resolution of the West Asia crisis, global crude oil prices are likely to average around $85–$90 per barrel in FY27, and households may have to share some of the burden. Moreover, there are also concerns about a higher probability of El Nino this year, with adverse implications for monsoon rains and thereby food inflation.

The headline inflation figure remained below the RBI’s medium-term target of 4% for the 14th consecutive month. The core inflation, excluding food and fuel segments, stood at 3.28% in March. The rural and urban inflation stood at 3.63% and 3.11% on-year respectively.

RBI to maintain status quo

Analysts expect the RBI to maintain status quo on policy interest rate given the growth concerns; some even see the possibility of a rate cut towards the end of the fiscal year if the growth outlook deteriorates below the long-term potential growth. “We expect CPI inflation to average 4.6% in FY27, in line with RBI’s projection.” said Rajani Sinha, Chief Economist at CareEdge Ratings.

The March print did indicate the initial impact of the West Asia conflict as the inflation in the fuel category recorded at 1.65% (y-o-y) for the month, higher than 0.14% in February and 0.35% January. Food inflation was 3.87% in the month, while combined food and beverages inflation stood at 3.71%.

Rural and urban inflation

The rural and urban inflation stood at 3.63% and 3.11% on-year respectively. The five key items with high inflation were silver jewellery (148.61%), gold/diamond, platinum jewellery (45.92%), Coconut:copra (45.52%), tomato (35.99%) and cauliflower (34.11%), the MoSPI said in a statement. Additionally, pan, tobacco and intoxicants inflation was at 4.2% (Y-o-Y). Education and restaurants had inflation of 3.3% and 2.9% respectively.

Sakshi Gupta, Principal Economist at HDFC Bank, said the higher liquified petroleum gas (LPG) prices majorly contributed to the rise in fuel inflation. “To recall, LPG prices were increased by Rs 60 for a 14.2 kg cylinder in March. On a sequential basis, fuel inflation was up by 1.5% m-o-m,” Gupta said.

Aditi Nayar, Chief Economist at Icra, said the sequential uptick in inflation was driven by the food and the electricity, gas and other fuels groups, with the latter reflecting the impact of the West Asia crisis across LPG and alternate fuels.

“Further, the impact of the unrest in West Asia will continue to feed into prices of several items such as alternate fuels, airfares (owing to higher aviation turbine fuel prices), restaurants (owing to higher commercial LPG prices), which along with rising input prices is likely to harden the April headline inflation print,” Nayar said.

Megha Arora, Director, India Ratings & Research, said the effect of LPG price hike has been captured by higher inflation in the fuel category. Consequently, inflation recorded by the LPG user segment of restaurants and accommodation services also increased to 2.88% in March from 2.73% in February and 2.87% in January, Arora said.

The RBI, in its first monetary policy of FY27, kept the policy repo rate unchanged at 5.25%, while warning of lower growth and higher inflation amidst the West Asia crisis. The central bank estimated CPI inflation at 4.6% for FY27, with quarterly variations ranging from 4% in Q1 to 5.2% in Q3. The RBI has projected core inflation at 4.4% for FY27.

Icra expects the CPI inflation to cross 4% in April, coming back into the upper half of the MPC’s medium term target range. Radhika Rao, Senior Economist at DBS Bank, expects the impact of higher energy prices to gradually percolate over the coming months, as replacement supplies arrive with a lag.

Vikrant Chaturvedi, Associate Director – Research, Brickwork Ratings, expects headline inflation to hover near current levels in the second half of the year, provided supply-side conditions remain favourable. The RBI is likely to maintain its neutral stance through the next quarter, as persistent services inflation and volatility in precious metals offset relief in the food basket.

Meanwhile, Arora said the upside risk to inflation persists from a possible reescalation in West Asia conflict leading to higher crude price, and El Nino conditions leading to a deficient monsoon and higher food prices – the latter being more pronounced in Q2 FY27.

India Ratings expects higher inflation accompanied with supply chain disruptions and status quo on key policy rates to weaken GDP growth to less than 7% in the first quarter of FY27 compared to 7.8% in FY26 Q1 and 7.6% in FY26.