Since the outbreak of the West Asia war, crude oil prices surged sharply. Brent crude, which traded in the low-$60s (US dollars per barrel) in mid-February 2026, climbed to a peak of $114. Following the ceasefire, it has eased to around $72 per barrel.
Hopefully, the fragile truce will hold, as continued hostilities have adverse implications for both the US and Iran. In India, prices of petrol, diesel, LPG and other fuels increased, adding to inflationary pressures. Going forward, however, the monsoon is likely to have a bigger influence on inflation—and consequently on the Reserve Bank of India's (RBI) interest-rate decisions.
Food matters
There is a defined basket of goods and services used to measure Consumer Price Inflation (CPI). Earlier, almost half the basket comprised food and food-related items. In January 2026, the basket was revised. Even in the revised basket, food and beverages account for 36.75% of the CPI. Pan, tobacco and intoxicants carry another 3%, while restaurants and accommodation services account for 3.35%.
Put simply, food and related items make up about 40% of the inflation basket.
By comparison, housing, water, electricity, gas and other fuels together account for 17.66%, while transport carries a weight of 8.8%. Although the exact weight of oil and gas is not separately available, it is clearly much lower than that of food.
Food prices, in turn, depend heavily on climate. The monsoon remains the primary source of water for Indian agriculture. This year, due to El Niño, the India Meteorological Department (IMD) has forecast rainfall at 90% of the long-period average (LPA), implying a 10% deficiency. Although the government has taken measures to support agriculture and maintains foodgrain stocks, some impact on food prices is inevitable.
Historical inflation trends also show that the food component has been the biggest driver of both rising and falling inflation. Assuming crude oil prices do not spike again, fuel prices are unlikely to rise further. Food inflation, therefore, remains the key uncertainty.
Inflation outlook
The latest CPI inflation reading stood at 3.93% for May 2026, released in June. However, what matters more is the outlook.
There are multiple research agencies, but we go with the forecast of RBI. It is the RBI who decides or influences interest rates across the system. In the policy review in April 2026, RBI projected inflation for 2026-27 at 4.6 percent, assuming crude oil at $85/barrel. In the latest policy review in June 2026, projected inflation for 2026-27 has been increased to 5.1 percent, assuming crude oil at $95/barrel.
Since crude prices have fallen significantly since then, there is room for a modest downward revision to the inflation forecast in the RBI's next policy review in August 2026.
Household impact
The government assigns CPI weights based on the consumption pattern of the average Indian household. Food may account for less than 40% of spending for an upwardly mobile urban consumer, but the CPI reflects a representative cross-section of the country.
If food prices rise because of weak monsoon conditions, household budgets are likely to come under pressure. LPG price increase has been already baked in; cereals, vegetables and other food items are the variables.
Rate outlook
The RBI bases its interest-rate decisions on several factors, with CPI inflation being the most important.
The repo rate currently stands at 5.25%. If CPI inflation moves closer to the 5% mark, the buffer between inflation and the policy rate narrows, increasing the likelihood of a rate hike.
However, this is expected to be a shallow rate hike cycle, say 50 basis points (0.5 percent).
Market impact
Higher interest rates are adverse for both equity and bond markets. However, much of this expectation is already reflected in asset prices.
In the bond market, yields have already moved higher in anticipation of rising inflation and potential RBI rate hikes. Equity markets, too, tend to price in known and expected developments well before they occur.
Monsoon watch
As of 6 July 2026, the rainfall deficiency had narrowed to 20% of the long-period average from a peak deficit of 43% recorded earlier in the season (till 27 June).
Hopefully, the shortfall will narrow further to around the 10% deficiency projected by the IMD by the end of the season.
Equally important is the distribution of rainfall—whether it is evenly spread across the country.
We can only keep our fingers crossed.
Joydeep Sen is a corporate trainer (financial markets) and author.