India Inflation May Exceed RBI's 6% Target in FY27: Report

India's inflation rate is likely to breach the Reserve Bank of India's (RBI) upper limit of 6% in the second half of the 2026-27 fiscal year, a brokerage firm has warned. Prabhudas Lilladher cited a confluence of factors, including the anticipated El Nino weather pattern and ongoing geopolitical disruptions, as key drivers pressuring food and input prices.

The brokerage highlighted several risks, such as deficient monsoons, critically low reservoir levels, and elevated crude-linked costs. The India Meteorological Department and Skymet predict El Nino this monsoon, with rainfall potentially falling short of the Long Period Average. This could lead to higher deficits in North, West, and Central India, impacting agricultural output.

While irrigation has lessened El Nino's impact on crop yields in recent years, historical data shows significant drops in Kharif production during previous El Nino events. Prabhudas Lilladher noted that El Nino has coincided with sharp inflation spikes in FY10 and FY13. The firm anticipates that the second-round effects of high crude prices and disrupted supply chains will eventually dampen demand.

With reservoir levels already 10% lower year-on-year and August rains expected to weaken, food inflation could accelerate. This comes at a time when unfavorable base effects are also anticipated. Unless monsoon distribution improves or geopolitical tensions ease, the brokerage sees an upward bias to its inflation forecast through the second half of FY27.

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Given this backdrop and current macroeconomic and geopolitical backdrop, we expect a spike in inflation which can even go beyond RBI upper band of 6% in 2H27.