Modest uptick in CPI inflation as volatility fears loom: SBI Research

NEW DELHI: Consumer Price Index (CPI) inflation rose for the third consecutive month, even as monsoon forecasts point to below-normal rainfall in FY27, according to the research report by the State Bank of India. The report, however, suggests that the impact on food prices looks limited at this point and that rates are likely to stay lower for longer.

India’s Consumer Price Index (CPI) inflation rose to 3.40 per cent in March, up from 3.21 per cent in February 2026, driven by rising prices of paan, tobacco and intoxicants as also housing, water and fuel. This marks the third consecutive month of increase under the revised 2024 base year series. “Paan, tobacco and intoxicants increased to 4.25 per cent (Feb: 3.44 per cent) and Housing, water and Fuel rose to 1.98 per cent (Feb: 1.48 per cent),” the report noted. Personal care and services exhibited significant decline due to moderation in gold and silver prices.

While all-India core inflation declined marginally, the state-wise picture remains uneven. “While all-India core inflation only decreased by 2 bps to 3.38 per cent in Mar’26, with the state-wise trend being quite divergent,” the report said. The state-wise trend is mixed, in some states the core is greater than overall and in others core is less. Telangana core CPI is near the 6 per cent mark.

Imported inflation remains a key concern amid global volatility. Owing to exchange rate fluctuations and external shocks like supply chain disruptions, the imported inflation (weight: 21.84 per cent) rose to 6.49 per cent in March 26 as compared to 6.35 per cent in Feb’26. The weighted contribution of imported inflation in overall inflation is now 43per cent.

State-wise imported inflation reveal that in Telangana, it has crossed 12 per cent mark in March 26. In states like Kerala, UP, TN and Andhra Pradesh it is hovering around 7.5 per cent. There is only two state (Goa/Delhi) where imported is less than the overall inflation.

Both rural and urban segments saw a mild upward movement in price levels. “Rural and Urban CPI inflation both increased in March 26 compared to Feb’26, indicating a mild upward movement in price levels across both segments.” Rural inflation rose from 3.37 per cent in Feb’26 to 3.36 per cent in March 26, while urban inflation rose from 3.02 per cent in Feb’26 to 3.10 per cent in March 26.

In rural areas, the change was “mainly driven by the ‘personal care and services’ which rises from 1.08 per cent in Feb’26 to 19.53 per cent in March 26, followed by ‘paan, tobacco and intoxicants’ of 1.41 per cent in Feb’26 to 4.11 per cent in March 26.” For urban areas, “the change is highest for the ‘paan, tobacco and intoxicants’ from 3.37 per cent in Feb’26 to 3.48 per cent in March 26 and lowest for the ‘personal care and services’ from 18.44 per cent in Feb’26 to 17.47 per cent in March 26,” according to the report.

On the monsoon front, the India Meteorological Department has forecast a deficient rainfall this fiscal. IMD has predicted a deficient rainfall during the current fiscal with southwest monsoon at 92 per cent of the LPA (slightly worse than SkyMet’S projection of 94 per cent last week) that has stoked fears of disruption on already fragile agri output front.

However, SBI research cautions that rainfall and food inflation do not share a linear relationship. “Years with relatively comfortable rainfall have still witnessed elevated food inflation such as 98 per cent rainfall with 8.43 per cent food inflation in FY09, 102 per cent with 15.2 per cent in FY11 while weaker rainfall years such as 93 per cent (FY13) and 91 per cent (FY19) were associated with much lower food inflation of 6.33 per cent and 0.09 per cent, respectively”, the report said.

The report adds that buffer stocks remain comfortable. “The buffer situation of the foodgrains (more so on rice front at 380 LMT) looks sufficient to thwart any untoward disruption on Kharif production front, if it be so”. Further, food production too has apparently little co-relation with rainfall pattern, even the years with lower than LPA rains witnessing good output.

What is important is the spatial distribution. Parts of the Northeast, Northwest and South Peninsula may still receive normal to above-normal rainfall. “Hence, even if the monsoon settles near 92% of LPA, the food inflation implications are likely to remain limited unless rainfall deficiency becomes concentrated in key kharif-producing belts,” the report said.

On external factors, the report flags continued FPI outflows and rupee volatility. “The outflows led by FPIs have been unabated post the Central Bank measures in last few days, ~$6.9 bn in total while rupee may lose its regained strength as volatility increases in global markets in lockstep with heightened hostility across West Asia.

The report notes that “it’s the structural reforms anchoring BoP that would have a sobering effect on the rupee’s slide, and not just some immediate solutions that in turn pose challenge to genuine investors and financial intermediaries quest for suitable hedging mechanisms as India seeks higher capital flows.”

Commenting on geopolitical developments, the report observed, “As the badly mediated talks in Islamabad gravitated towards the abyss of a near certain failure, volatility lapped global markets again with the threats of US to intercept/divert/ capture vessels passing through the blockaded area stoking fears of heightened pressure on supply chains, chiefly energy prices and maritime trade and upward pressure on imported inflation”.

It added, “The tacit move of US seems to be multi fold, we believe; forcing Asian majors (to pressurize Tehran to come to deal table), nudging NATO to reconsider its approach should the aggression reach another territory and enabling select oil behemoths to have a larger say in the alternate supply chains that may continue even when conflict is amicably resolved.”

Despite the modest uptick in CPI and fears around imported inflation, the report suggests that “FY27 to be a year with below normal rainfall, though the impact on food prices looks limited at this point: rates to stay lower for longer”. (ANI)