Inflation in India seen at 5% in FY27, 50-75 bps rate hikes likely as food and fuel risks build: Report

India's inflation is on an upward trajectory, with projections indicating it will reach 5.0% in fiscal year 2027, according to a report by ICICI Bank Global Markets. Core inflation is expected to stand at 4.6%. The brokerage firm also anticipates potential policy rate hikes of 50-75 basis points, as the Monetary Policy Committee has already acknowledged higher estimates for the latter half of the fiscal year.

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Inflation moved to 16-month high

The report highlights several risks that could push inflation higher. The ongoing conflict in West Asia poses a significant threat, with potential second-round impacts on household items and other segments due to rising input costs. Additionally, a projected below-normal monsoon, estimated at -10% of the long period average, adds another layer of concern. This could impact the production of rain-fed crops like coarse cereals, pulses, oilseeds, and spices, although cereals may be somewhat protected by irrigation and existing stocks.

Food inflation has already shown an acceleration, rising to 4.8% year-on-year in May from 4.2% in April. Vegetable prices, in particular, surged by 5.7% year-on-year, the highest in 10 months, after experiencing contractions for five months. Extreme heat contributed to month-on-month increases in tomatoes, cauliflower, cabbage, and potatoes. Core inflation, excluding jewelry, also firmed to 2.4% year-on-year, driven by rising prices in restaurant services, clothing and footwear, and household goods.

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The ongoing uncertainty around the resolution of the conflict could continue to impart an upside-bias to the inflation, with second-round impact of higher input costs seen across household items, appliances and other segments

While a recent dip in oil prices offers some relief, the report suggests that unless geopolitical risks in West Asia subside quickly, further interest rate hikes remain a possibility. ICICI Bank Global Markets forecasts inflation to average 5.0% in FY27, slightly below the Reserve Bank of India's estimate of 5.1%.

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Core inflation excluding jewelry rose to 2.4 per cent YoY from 2.2 per cent YoY given rising prices across restaurant services 5.7 per cent YoY, clothing and footwear 3.0 per cent YoY and household goods and appliances 1.9 per cent YoY