Business
India inflation outlook worsens as Middle East oil shock builds: Nomura
Nomura raised its FY27 India inflation forecast to 4.5% from 3.8% as higher oil and gas prices triggered by Middle East tensions are expected to push consumer prices higher.
India’s inflation outlook could worsen in the coming months as rising energy prices triggered by Middle East tensions disrupt the recent disinflation trend, Nomura said in a note. The brokerage raised its FY27 consumer inflation forecast to 4.5% from 3.8%, citing higher oil and gas prices and potential spillovers into transport, food and services costs.
Key highlights
- Nomura raises FY27 India CPI forecast to 4.5% from 3.8%
- February CPI inflation rises to 3.2% year-on-year
- Energy price shock linked to Middle East conflict threatens disinflation trend
- LPG price increase alone may add about 14 basis points to inflation
- Nomura expects RBI to keep rates on hold while monitoring inflation risks
Inflation rises in February as food prices climb
India’s consumer price index (CPI) inflation rose to 3.2% year-on-year in February, up from 2.7% in January, slightly above market expectations, according to Nomura’s analysis.
The increase was largely driven by food prices, with food and beverages inflation rising to 3.4% from 2.1% in the previous month.
Core inflation, which excludes food and fuel prices, remained stable at 3.4%, slightly below Nomura’s expectations, suggesting underlying price pressures remain relatively contained for now.
Within the food basket, price increases were mainly seen in pulses and edible oils, while vegetable prices remained soft.
Among core components, personal care inflation rose due to higher gold and silver prices, while intoxicant prices increased after a cigarette tax hike introduced in February.
Middle East energy shock disrupts disinflation trend
Nomura said the broader trend of declining inflation until February could now be disrupted by an energy price shock linked to escalating tensions in the Middle East.
The closure of the Strait of Hormuz, a key global energy shipping route, has raised concerns about supply disruptions and higher energy costs for import-dependent economies such as India.
Reflecting these risks, Nomura revised its average oil price assumption to $86 per barrel for 2026 and raised its FY27 CPI forecast to 4.5% from 3.8%.
The brokerage said the combined impact of energy prices and favourable base effects in food inflation could push headline inflation higher in the coming months.
Multiple inflation pressures emerging
Nomura highlighted several channels through which the energy shock could affect consumer prices.
Retail LPG prices, which have a 1.98% weight in the CPI basket, have already risen by about 7%, which could add roughly 14 basis points to headline inflation. The brokerage expects a further 5% increase in LPG prices in its baseline scenario.
While petrol and diesel prices may remain unchanged for now, higher aviation turbine fuel costs are expected to put upward pressure on airfares.
Shortages of commercial LPG could also increase costs for restaurants, pushing up food prices in the services sector.
At the same time, a shortage of natural gas has forced the government to ration supplies, prioritising households and transportation. If the shortage persists, taxi and bus fares could also rise, adding to inflation.
Higher energy costs may also lift goods inflation, while more expensive fertilizers could eventually put upward pressure on food prices.
RBI likely to stay cautious despite inflation risks
Nomura said the changing global environment may render the Reserve Bank of India’s earlier dovish stance outdated.
The brokerage expects the central bank to maintain the repo rate at current levels while assessing the duration of the energy shock and its impact on inflation expectations.
Markets have already started pricing in potential rate hikes, but Nomura expects the RBI to adopt a more patient approach because the current inflation pressure is largely driven by supply-side factors.
The next key policy meeting of the Monetary Policy Committee (MPC) is scheduled for April 6.
Nomura expects policymakers to adopt more cautious communication on inflation risks, even if interest rates remain unchanged.
What happens next
Nomura said the outlook for inflation will depend heavily on how long the Middle East energy disruption persists.
If higher oil and gas prices begin to spill over into core inflation and inflation expectations, the RBI could face pressure to shift toward a more hawkish policy stance.
For now, however, the brokerage expects the central bank to remain on hold through 2026, while monitoring developments in energy markets and domestic price trends.
FAQs
Q1: Why did Nomura raise India’s inflation forecast?
Nomura raised its FY27 CPI forecast to 4.5% due to higher energy prices caused by Middle East tensions and potential spillover effects on transport and services costs.
Q2: How much did inflation rise in February?
India’s CPI inflation rose to 3.2% year-on-year in February, up from 2.7% in January.
Q3: How could energy prices affect inflation?
Higher LPG, aviation fuel and transport costs could raise consumer prices, while energy-linked input costs may also increase goods and food inflation.
Q3: What is Nomura’s view on RBI policy?
Nomura expects the RBI to keep interest rates on hold for now, while monitoring the impact of the energy shock on inflation and economic conditions.
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