India's inflation trajectory is providing the Reserve Bank of India with greater flexibility to maintain interest rates during the first quarter of fiscal year 2027. However, risks related to food and fuel could alter the situation in the second half of the year. Yes Securities anticipates that the headline Consumer Price Index for Q1FY27 will fall short of the RBI's 4.2 per cent projection, as the May reading of 3.93 per cent year-on-year and favorable base effects keep the average low. Nevertheless, increasing momentum in vegetable prices, core services, and pump prices, along with the looming El Nino threat, suggests the RBI will likely remain data-dependent rather than implementing a rate hike in August.
May CPI Details
Headline CPI for May rose to 3.93 per cent year-on-year from 3.48 per cent in April, driven by a 0.75 per cent month-on-month gain, the strongest since April. Transport costs led the increase, with petrol and diesel pump prices rising 1.9 per cent month-on-month. Restaurant and accommodation services increased by 1.8 per cent, and personal care by 1.2 per cent. Core CPI also edged higher to 3.9 per cent year-on-year from 3.7 per cent in April, with sequential momentum picking up to 0.50 per cent from 0.35 per cent.
Food Inflation Concerns
Food inflation remains a key watchpoint. Food and beverages inflation accelerated to 4.5 per cent year-on-year from 4.0 per cent in April, with a month-on-month surge of 0.9 per cent compared to 0.2 per cent earlier, according to the brokerage. Vegetables reversed months of deflation with a 2.45 per cent month-on-month jump. Tomato prices spiked 25.6 per cent month-on-month, potato 4.5 per cent, and onion 2.10 per cent. Ready-made food also accelerated to 1.6 per cent month-on-month from 0.7 per cent. While fruits and nuts saw a 0.45 per cent month-on-month degrowth, rising risks from food inflation, particularly in the context of El Nino, continue to warrant concern going forward, the report noted.
Fuel and Core Pressures
Fuel inflation turned positive at 0.4 per cent month-on-month after the print came in negative at -0.05 per cent in April. Annually, it stood at 0.8 per cent year-on-year. Electricity remained in deflation at -3.1 per cent year-on-year, but coal, kerosene, and biogas provided upside. The RBI has already revised oil assumptions to USD 95 per barrel for policy calculations, up from USD 85 earlier, and under-recoveries of Rs 6 per litre on petrol and Rs 30 per litre on diesel suggest that one cannot rule out further increases in pumphead prices.
Core pressures are also creeping up. Personal care and miscellaneous items rose to 18.5 per cent year-on-year, driven by silver jewellery up 155.2 per cent year-on-year and other precious metals up 40.9 per cent after higher import duties from May 13. Restaurant and accommodation services hit 5.7 per cent year-on-year versus 4.2 per cent earlier.
Outlook and RBI Stance
With May at 3.93 per cent, June would need to breach 5 per cent for Q1FY27 to meet the RBI's 4.2 per cent estimate. Yes Securities' June projections suggest an undershoot, giving the RBI comfort to delay hikes. While we had earlier indicated the possibility of a rate hike in the August meeting, we now assign a lower probability to that outcome and reiterate that the RBI will remain data-dependent, the report said. Brent's fall to USD 86 per barrel and a possible US-Iran deal add uncertainty, making the RBI likely to assess second-round effects before acting.
