However, since late 2019, thanks to a series of supply shocks like the Covid pandemic and Russia’s war in Ukraine, not to mention unseasonal rains and such disturbances within the country, India’s inflation rate often stayed above the RBI’s target, and often even outside its comfort zone. The RBI’s comfort zone ranges between 2% to 6% of inflation (see CHART 1).
The inflation rate has been moderating since the highs of 2022-23, and as of the last financial year (2025-26) that ended in March, inflation was closer to 2% — the other end of the RBI’s comfort zone. A lower inflation rate had opened up the space for lower interest rates, making it cheaper for people and businesses to borrow money. Lower interest rates imply lower EMIs for home and car loans.
But just in the last month, the severity of the energy supply shock in the wake of the US attack on Iran and the latter’s decision to choke the Strait of Hormuz has raised the spectre of a sharp spike in inflation.
The key question is: By how much?
There are two big variables that are likely to decide how inflation will pan out. One, the price of crude oil. Many had hoped that when US President Donald Trump addressed the American public on April 2, he would signal a withdrawal, thus starting a process whereby energy prices would start to moderate.
But contrary to such expectations, he signalled another 2-3 weeks of hostilities with a distinct possibility of intensified bombing in Iran. Not surprisingly, following his speech, Brent crude oil prices for future contracts, the global benchmark, shot up to almost $110 per barrel. The spot prices reportedly skyrocketed to over $141 per barrel — the highest since 2008, just before the global financial crisis. Given how this war has panned out, it is anybody’s guess what will be the health of energy markets in three week’s time.
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The second big variable that is almost equally important in India’s case is El Niño, which refers to a natural climatic phenomenon that essentially results in higher temperatures and lower rainfall during the monsoon. The more severe the El Niño, the worse it is for the economy as well as the country’s agriculture starves for water availability.
The intensity of these two factors is likely to have the biggest impact on India’s inflation in the coming months.
TABLE 1 alongside is compiled by Pranjul Bhandari of HSBC Global Investment Research that lays out the different possible scenarios for inflation. HSBC’s pre-energy shock inflation forecast for FY27 was 4%.
The key takeaway from this table is that with a moderate El Niño effect, inflation in India will stay within the RBI’s comfort zone (green coloured boxes) even if crude oil prices stay close to $100 a barrel. However, if India suffers an extreme case of El Niño this year, then even at $90 a barrel, inflation rates may breach RBI’s comfort zone (red coloured boxes).
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As the inflation rate moves from the green zone to the red zone, the chances of RBI raising interest rates go up.
Of course, if the US-Iran conflict drags on (like the Russia-Ukraine war) or worsens, crude oil prices could go up further from the current level, raising the prospects of significantly high levels of domestic inflation.