India's inflation accelerates to 3.93% in May, remains a tad below RBI target

NEW DELHI: India’s retail inflation rose to 3.93% in May, driven by higher food and fuel costs, government data showed on Friday, while risks related to the Middle East conflict and a weak monsoon threatened to add further price pressures.

May’s reading was marginally below the Reuters projection of 4.0% and remained close to the Reserve Bank of India’s medium-term target.

It was also the highest reading under the revised inflation series introduced in January with a new base year and consumption basket.

The data comes after state-owned fuel retailers raised fuel prices four times in May alone, pushing up transport inflation to 1.75%, from a decline of 0.01% in April.

Food inflation accelerated to 4.78% in May from 4.20% in April and could rise further if El Nino conditions weaken rainfall during the June-September monsoon season.

“We estimate inflation at 5.2% for fiscal 2027, with headline likely to cross 6% in third-quarter FY27. Apart from elevated energy prices, El Nino-related disruptions also pose upside risks to the inflation outlook ahead,” said Sakshi Gupta, principal economist, HDFC Bank.

The monsoon brings about 70% of India’s annual rainfall and is critical for agriculture and rural incomes, with nearly half of farmland lacking irrigation and millions dependent on farming for their livelihood.

India inflation likely rose to 4% in May as food, fuel costs climb: Reuters poll

The RBI raised its inflation forecast for the current fiscal year to 5.1% from 4.6% earlier this month but kept rates on hold as it watches for the effects of a second-round of supply-driven inflation pressures.

So far core inflation, which excludes volatile food and energy costs and reflects more generalised price pressures, has remained in check.

It stood at 3.9% in May, according to estimates by Kotak Institutional Equities.

“The sub-4% headline and core inflation points towards comfortable trends in the near term,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank in Mumbai.

“While softening crude oil prices and the cap on the weakening rupee remain a tailwind, we continue to monitor the impact of adverse monsoons on food inflation,” Bhardwaj, who expects 50 basis points in rate hikes beginning in October, added.

To combat the impact of rising energy prices and the resulting effect on the rupee, the federal government and the RBI announced a series of measures earlier this month to attract dollar inflows and support the domestic currency.

The Indian rupee sank to a record low of 96.96 on May 20, taking losses since the Iran war broke out to nearly 5%. A weaker rupee pushes up prices of imported goods and adds to inflation.