In the second reading under the new series (base: 2024=100), India’s CPI inflation rose further to 3.21% YoY in Feb-26 from 2.74% in Jan-26. This marks the second highest annualized increase since May-25. While the acceleration was largely anticipated, the upside was marginally higher than the market consensus estimate of 3.1%.

Key highlights of Feb-26 data

• On a sequential basis, CPI posted an increase of 0.11%, softer than the series median increase of 0.18% MoM usually seen in February.
• Annualised Food & Beverages inflation rose further to 3.47% in Feb-26. Having said, on a sequential basis, food prices continued to contract for the third consecutive month by 0.15% MoM. 
  1. The sequential decline was prominent for Vegetables, tubers, plantains, cooking bananas & pulses (-3.8%), Meat (-1.0%), and Milk (-0.2%). The remaining price corrections were concentrated within the Beverages category, including Cocoa drinks, Soft drinks, Tea (each at -0.2%), followed by Water and Fruit & vegetable juices (each at -0.1%).
  2. This was partially offset by a sequential increase in prices for Fruits & Nuts (+4.1%), Oils & fats (+0.8%), Fish & other seafood (+0.7%), Ready-made food & other food products (+0.7%) and Services for processing primary goods for food (+0.3%). 
• Consolidated fuel inflation remained flat at 0.1% YoY in Feb-26 compared with Jan-26. Sequentially, the prices were largely stable. While Biogas and gobar gas (+1.5%), Kerosene (+0.7%) and Charcoal (+0.3%) led the upside, PDS Kerosene (-0.8%) and LPG (-0.1%) were the only sequential price laggards.  
• Core CPI inflation (represented by the CPI excluding indices of Food & Beverages, Electricity, gas and other fuels, and petrol, diesel & other fuels items within the Transport division) remained unchanged at 3.7% YoY, compared with Jan-26. 
  1. Core-Core CPI inflation (excluding gold, silver, diamond, platinum jewellery & other items from Core CPI) also held steady at 2.1% YoY in Feb-26. 

Inference and Outlook

Feb-26 CPI inflation highlights the following developments:

• While precious metals continue to add ~160 bps to core CPI and warrant close monitoring (IMF precious metals index up ~52% FYTD till Feb-26), underlying price pressures remain subdued - as captured by the benign core-core readings.
• Vegetable prices continued to show a broad-based easing, despite having undershot their typical winter-season correction. At an item-wise level, sequential gains in green chilli, parwal and garlic were more than offset by price declines in tomato, pea, cauliflower, potato and onion, among others.

Looking ahead, the near-term outlook for food prices remains exposed to the evolving weather-related risks. Rabi sowing concluded ~6% above normal as of 30^th Jan-26, with total acreage up ~2.4% YoY driven by wheat. Having said, the spike in temperatures during Feb-26 and the early part of Mar-26 could pose a risk to the standing wheat yields. In addition, while the IMD has projected normal cumulative rainfall (83-117% of LPA) for Mar-26, the potential emergence of El-Nino conditions over Jun-Aug-26 (with a 62% probability) raises risks of an adverse impact on the south-west monsoon, alongside the development of intense heatwaves predicted over the upcoming summer months.

While the Feb-26 CPI inflation print is a precursor to the price and supply shocks emanating from the ongoing US/Israel-Iran conflict, the near-term inflation outlook pivots hereon, from a benign trajectory to one increasingly contingent on the evolving external headwinds. 

A few emerging upside risks that one needs to be watchful of:   

• WPI is likely to register the earliest and most pronounced pass-through of the oil price shock, owing to the higher weight of crude oil and other related products (10.36%) in the WPI basket. Note, Brent crude, which averaged about USD 70 pb pre-conflict, has already risen by ~23.4% since the war’s onset and may recalibrate to a higher baseline in the near term. 
• As per RBI estimates, a 10% increase in crude oil price translates into 30 bps upside to CPI inflation and a 15-bps downside to GDP growth. However, these baseline estimates, based on the old inflation series, understate current sensitivities, as the combined weight of petrol and diesel items has doubled from 2.3% to 4.8% under the revised CPI basket. Having said, a full pass-through is unlikely in the near term, owing to initial price absorption by OMCs via margin compression on their balance sheets. 
• While an oil-price pass-through could be delayed, domestic households have already begun to feel the heat of the skyrocketing LPG prices via ~6.9% hike in domestic LPG cylinder price, which could translate into a 14-bps direct increase in headline CPI, spread over Mar-Apr-26.
• Elevated LNG prices could increase feedstock costs for ammonia and urea production. If sustained into the kharif season, these may gradually pass through to food prices, posing a lagged upside risk to the food inflation trajectory, which has so far remained benign and helped anchor the headline CPI. 
• Having already depreciated 6.9% FYTD (till Feb-26) amid sustained capital flight, the rising crude price has further compounded an additional 1.5% weakening of the INR (slipping past the 92/USD mark as of 12^th Mar-26), since the war’s onset. Amidst a recovery in domestic consumption and a dissipating disinflationary impulse from GST rate cuts, the second-order effects from currency depreciation and higher fuel costs could gradually exert upside risks to the underlying core CPI outlook (ex-precious metals). 
• While the MPC held the repo rate at 5.25% in Feb-26 amidst a benign outlook on inflation, it could now get into a cautious pause with a focus on durable liquidity injection while constantly assessing the playout of various inflation risks. 

Going forward, the inflationary impact of the ongoing Middle East crisis will hinge primarily on two factors: the duration of the conflict and the extent of disruption to global energy supplies. If tensions in the Middle East remain contained over the next 1-2 months, the macro fallout could likely be cushioned via domestic buffers and appropriate policy responses.

From our earlier FY26 CPI estimate of 2.1% premised on crude oil prices at ~USD 70 pb, CPI could potentially rise to 4.2–4.6% if prices sustain in the USD 80-90 pb range. However, in a worst-case scenario with prices sustaining above USD 100 pb, inflation could see a further upside to ~5.0% in FY27. 

Table 1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes the group Electricity, gas and other fuels under the Household, water, electricity & other fuels division, and Diesel, Petrol and natural gas (CNG) items from the Transport division.

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI.

3) Readings under the memo items are derived from imputed indices. Figures have been rounded off.

Chart 1: ~39% of the CPI items lie within the 2-6% inflation band, while 49% items record inflation below the lower tolerance band in Feb-26

Chart 2: ~50% of the CPI basket by weight lies within the 2-6% inflation band, while ~38% basket records sub-2% inflation in Feb-26