India’s headline inflation for fiscal 2027 is projected to average 5.6%, with no significant rate hike beyond 50 bps anticipated, according to a report. The Reserve Bank of India is likely to undergo a limited rate hiking cycle, foreseeing two rate hikes over Q3CY26 and Q4CY26, potentially raising the repo rate to 5.75%, as energy and El Niño shocks drive up food and fuel prices. The report from HSBC Global Investment Research suggests a cautious approach, expecting the RBI to view a portion of the inflation surge as temporary.
The research firm had previously estimated that CPI inflation would converge towards 4% by March 2028. The repo rate forecast is based on an assumption of oil prices averaging $95 per barrel in FY27, coupled with a prospective agreement leading to a gradual reopening of the Strait of Hormuz around mid-June. In May, the consumer price index inflation climbed to 3.9% year-on-year, up from 3.5% in April, with a monthly sequential momentum increase to 0.5% month-on-month.
Non-food goods inflation is notably higher at 5.1% year-on-year compared to services inflation at 2.1% year-on-year. Food inflation accelerated, with a monthly sequential momentum rise to 0.6% in May from 0.3% in April, driven by heatwaves in various regions of India elevating vegetable prices, especially tomatoes, chillies, and cabbage. Additionally, prices of fruits, edible oil, and spices registered a significant uptick in sequential terms.
The report highlights a concerning trend of increasing average temperatures due to global warming, surpassing critical thresholds, which could have a more substantial impact on food inflation than rainfall, particularly during El Niño years.
