India CPI Inflation for Feb-26 comes in higher at 3.21%

HIGHER INFLATION – NEW SERIES IMPACT

Effective January 2026, India shifted the calculation of inflation to the new series. That has led to higher inflation. For instance, January inflation was at 2.74% (revised), while the February inflation has come in higher at 3.21%. There are two factors that have triggered higher inflation in the new series. Firstly, the weightage to food has been substantially cut by close to 900 basis points. Remember, it was negative food inflation that was driving the headline inflation lower. Secondly, the shift in the base year to 2022-23 has also resulted in the inflation going up. Here is a quick break up.

KEY DRIVERS OF HEADLINE INFLATION IN FEB-26

1. Food inflation has gone up from negative zone to positive zone and is now driving the headline inflation higher. This can be attributed to the base effect.
2. Despite the crisis in the Middle east, the impact on fuel and transport inflation is limited due to the end-user prices being heavily regulated in India.
3. In terms of products; Garlic, Onions, Potatoes, and Tur Dal have contained inflation. Pressure has come from gold, silver, copra, tomatoes, and cauliflower.
4. The area of concern remains gold and silver, which is reflected under Personal Care header. That has been driving up core inflation quite strongly in recent months.

WHERE DOES CPI INFLATION GO FROM HERE?

Let us look at the impact of 4 critical baskets and the impact that it could have in the coming months on consumer inflation.

1. Let us look at food inflation first. While it is in positive territory, it is well in control. It looks like FY26 inflation should still remain under 2%, but the big question is FY27. The action shifts to the monsoons this year and the resultant Kharif output.
2. A lot of the action is happening in the Middle East, but Indian fuel prices are still regulated. However, the pass-through will have to come through. If Brent Crude stays above $100/bbl, oil prices will start to seep into CPI inflation in a big way.
3. Core inflation is the joker in the pack, and that is largely on account of the prices of gold and silver. They have been the key drivers of inflation in the last year or so, and with the global uncertainty, there are no signs of precious metals inflation relenting.
4. If one looks at the break-up of rural and urban inflation; then rural inflation is sharply higher in case of clothing, footwear, gold, and silver. In all other baskets, it is the urban inflation that leads. It shows the shifting consumption pattern of rural India.

The one impact that markets are expecting is that even if fuel prices are regulated, higher crude prices will eventually seep through other downstream products. That could result in a spike in bond yields. That is evident in the selling seen in long-duration bonds!