India’s retail inflation is expected to rise sharply over the next two months after a steep increase in petrol and diesel prices triggered concerns among economists and policymakers over mounting price pressures across the economy. Experts believe the fuel price hikes, coupled with elevated global crude oil prices and a weakening rupee, could complicate the Reserve Bank of India’s inflation management strategy in the coming quarters.
Over an 11-day period beginning May 15, petrol prices were increased by Rs 7.38 per litre, while diesel prices rose by Rs 7.48 per litre, with minor inter-city variations. The increase is expected to have a cascading effect on transportation, logistics, storage, manufacturing and even electricity costs, as fuel remains a key input across sectors.
Economists say the impact of these price revisions will begin reflecting in the Consumer Price Index (CPI) data for May, scheduled to be released on June 12, while the full impact is likely to be visible in June inflation figures.
EY India Chief Policy Advisor D K Srivastava estimated that the average Rs 7.5 per litre increase in fuel prices could raise CPI inflation by nearly 75 basis points. According to him, retail inflation may rise to around 4-4.5 per cent in May and further increase to 4.5-5 per cent in June.
“Since the increase in CPI is cost-driven, adjustments in repo rate may have limited effect in containing inflation,” Srivastava told PTI. He added that the RBI may initially prefer to assess the broader impact over a quarter before taking any policy action. However, if inflation crosses the 5 per cent mark and continues to gain momentum, the central bank may consider tightening interest rates.
The RBI’s Monetary Policy Committee (MPC) is widely expected to maintain a “neutral pause” in its June 5 policy meeting, keeping key policy rates unchanged despite emerging inflationary risks. Analysts believe the central bank will avoid immediate action because the current inflationary trend is largely supply-driven rather than demand-led.
India Ratings & Research Director Megha Arora said June CPI inflation is likely to exceed 4 per cent, although it may remain within the RBI’s upper tolerance limit of 6 per cent. She estimated that the four rounds of fuel price hikes so far could increase June inflation by nearly 38 basis points, with additional upside risks if fuel prices continue to rise.
The inflation outlook has become more uncertain since the RBI’s April monetary policy review, where it had assumed crude oil prices at around USD 85 per barrel while preparing its growth and inflation projections. Since then, global crude prices have moved closer to the USD 95 per barrel mark due to geopolitical tensions and supply concerns, intensifying fears of imported inflation.
Barclays India Chief Economist Aastha Gudwani warned that prolonged uncertainty in energy markets could spill over into transportation fares, raw material costs and final consumer prices, making inflation difficult to manage during the second half of FY27.
“While we believe there will be no policy rate action in June, we are incrementally getting worried that as this uncertain backdrop lingers, spillover effects may make inflation outcomes in the second half of FY27 difficult to digest, necessitating a rate hike,” Gudwani said.
Barclays has projected that the RBI may revise its FY27 inflation forecast upward from 4.6 per cent to 5 per cent and lower its economic growth estimate from 6.9 per cent to 6.7 per cent after the upcoming MPC meeting.
Apart from fuel prices, the government’s recent decision to increase import duty on gold and silver to 15 per cent is also expected to contribute to inflationary pressures by increasing costs of imported commodities.
Wholesale Price Index (WPI) inflation has already surged to a 42-month high of 8.3 per cent in April, reflecting rising global commodity prices. However, retail inflation remained relatively moderate at 3.48 per cent due to limited transmission of higher wholesale prices to consumers so far.
Economists believe that situation may now change rapidly as higher fuel costs begin feeding into the broader economy. Crisil Principal Economist Dipti Deshpande noted that inflationary pressures are currently being driven by supply-side factors such as expensive fuel, higher input costs and currency weakness.
She stated that while the MPC may temporarily “look through” these pressures, policymakers would remain alert to the risk of inflation expectations becoming entrenched among households and businesses, leading to wider price increases across sectors.
ICRA Chief Economist Aditi Nayar also said the immediate impact on May inflation would likely be modest, but June figures would show stronger transmission effects. ICRA now expects average CPI inflation for FY27 to remain around 5 per cent, assuming crude oil averages USD 95 per barrel during the fiscal year.
With inflation risks rising and global commodity markets remaining volatile, the RBI faces a delicate balancing act between supporting economic growth and maintaining price stability in the months ahead.
