Inflation Likely Hits RBI Target as Fuel Costs and Vegetable Prices Surge Amid Geopolitical Tensions

Inflation Likely Hits RBI Target as Fuel Costs and Vegetable Prices Surge Amid Geopolitical Tensions​

A Reuters poll of economists indicates that India’s inflation has likely climbed to 4.0% in May, coinciding with the Reserve Bank of India's medium-term target. This upward movement is primarily attributed to increased vegetable prices and sharp increases in fuel costs following escalating global tensions linked to the US and Israel war against Iran.

The poll found that food inflation continued its rise from previous low levels. This marks a shift from a sustained period where inflation had remained below the RBI’s 4% target for 15 consecutive months. The increasing operational costs, especially related to transport, are now placing direct pressure on consumer prices.

Vegetables and Fuel Costs Drive Inflation to 4%​

The poll of 38 economists showed that India's CPI inflation likely reached 4.0% in May, up from 3.48% recorded in April. Kanika Pasricha, chief economic adviser at Union Bank of India, stated that the crossing of the 4% threshold was driven mainly by vegetables and transport inflation.

Supply chain disruptions caused by the ongoing global conflict have adversely impacted commodity availability, according to experts. Coupled with severe heatwaves across multiple regions, vegetable prices saw a rebound during the summer months. This inflationary pressure is set against warnings from the India Meteorological Department that this year's monsoon could be the weakest in 11 years.

Union Bank of India estimates that transport inflation likely jumped significantly, forecasting it at 4.15% in May from -0.01% in April. This sharp increase reflects the pass-through effect following state-owned fuel retailers raising prices four times in May alone.

Rising Wholesale Costs Signal Gradual Consumer Price Hike​

While headline inflation was below expectations in April, wholesale price inflation accelerated significantly, reaching 8.3%. Economists project that this input cost rise will continue to climb further to 9.05% in May. These rising costs are expected to gradually feed into the consumer market.

Sakshi Gupta, principal economist at HDFC Bank, commented that the impact of the war should begin manifesting in the May print. She noted that the transition of higher wholesale prices to retail pricing typically involves a period of lag. Earlier low inflation figures were partly attributed to limited pass-through and supportive lower gold prices.

Economists are now factoring this uncertainty into forward guidance, with the central bank increasing its annual inflation forecast to 5.1% for the current fiscal year, up from the previous estimate of 4.6%.

Central Bank Maintains Rates Amid Inflation Vigilance​

The RBI held key interest rates unchanged last week, a move that was widely anticipated by the market. Governor Sanjay Malhotra indicated that while underlying inflation pressures remained benign, they warrant continued vigilance.

Core inflation, which excludes volatile food and fuel prices, is expected at 3.80% for May. This core figure provides insight into non-volatile price movements, offering economists a view of persistent domestic inflationary trends despite the external shocks.