inflation-seen-at-5-pc-in-fy27-interest-rate-hikes-likely

Inflation is expected to rise to 5 per cent in FY27, with food prices, energy costs and weather-related risks likely to keep price pressures elevated, according to a report by ICICI Bank Global Markets, which also sees scope for 50-75 basis points of policy rate hikes.

 

The brokerage said consumer price inflation (CPI) rose to a 16-month high of 3.94 per cent year-on-year in May from 3.48 per cent in April, indicating broad-based price pressures despite remaining below its estimate of 4.05 per cent.

 

Food inflation accelerated to 4.8 per cent in May from 4.2 per cent in April, while core inflation increased to 3.9 per cent from 3.7 per cent. Energy inflation also picked up sharply to 1.9 per cent from 0.4 per cent in the previous month.

 

According to the report, uncertainty stemming from the conflict in West Asia remains a key upside risk for inflation. Higher global energy and input costs could spill over into household goods, appliances and other consumer segments, resulting in broader inflationary pressures.

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The report also highlighted concerns over a below-normal monsoon, estimated at 10 per cent below the long-period average. Such conditions could affect rain-fed crops including pulses, oilseeds, coarse cereals and spices, although staple cereals may be less vulnerable due to irrigation support and existing stocks.

 

Food prices have already shown signs of acceleration. Vegetable inflation rose to 5.7 per cent in May, the highest level in 10 months, following five months of contraction. Prices of tomatoes, cauliflower, cabbage and potatoes recorded notable month-on-month increases amid extreme heat conditions.

 

Other food items, including eggs, milk products, edible oils and processed foods, also witnessed price increases. On an annual basis, oil and fats, fresh meat, fruits and nuts, fish and seafood, and spices remained among the major contributors to food inflation.

 

ICICI Bank Global Markets said inflation is likely to average 5 per cent in FY27, close to the Reserve Bank of India's projection of 5.1 per cent.

 

While a recent moderation in crude oil prices offers some relief, the brokerage warned that unless geopolitical tensions ease and weather conditions improve, inflation risks will remain elevated, increasing the likelihood of further monetary tightening by the RBI.