Inflation is projected to rise to 5.0 percent in FY27, with core inflation at 4.6 percent, according to a report by ICICI Bank Global Markets. The ongoing conflict in West Asia and a below-normal monsoon are keeping upside risks alive. The brokerage now sees a case for policy rates to be hiked by 50-75 basis points, as the Monetary Policy Committee (MPC) has already acknowledged higher estimates for the second half of the fiscal year.
Inflation at 16-Month High
In its June 12, 2026 report, ICICI Bank Global Markets noted that inflation moved to a 16-month high. The Consumer Price Index (CPI) rose to 3.94 percent year-on-year in May from 3.48 percent in April, slightly below the firm's estimate of 4.05 percent but still showing broad-based pressure. Food inflation accelerated to 4.8 percent year-on-year from 4.2 percent in April, core inflation to 3.9 percent from 3.7 percent, and energy inflation to 1.9 percent from 0.4 percent.
Key Risks: Conflict and Monsoon
The brokerage flagged the West Asia conflict as a key risk. "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," ICICI Bank Global Markets said. Additionally, a below-normal monsoon at -10 percent of the Long Period Average (LPA) adds another layer of risk. Rain-fed crops such as coarse cereals, pulses, oilseeds, and spices face production risk, while cereals remain better protected due to irrigation and stocks.
Food Inflation Pressures
Food momentum is already turning. Vegetables inflation jumped to 5.7 percent year-on-year in May, the highest in 10 months, after five months of contraction. Tomatoes surged 26 percent month-on-month, cauliflower 12 percent, cabbage 11 percent, and potato 4.5 percent, all due to extreme heat. Eggs rose 2.6 percent month-on-month, ready-made products 1.5 percent, milk and dairy 0.9 percent, and edible oils 0.8 percent. On a year-on-year basis, oil and fats and fresh meat both ran at 9.5 percent, fruits and nuts at 8.2 percent, fish and seafood at 7.5 percent, and spices and seeds at 6.8 percent.
Core Inflation Firming
Core pressure is also firming. "Core inflation excluding jewelry rose to 2.4 percent year-on-year from 2.2 percent year-on-year given rising prices across restaurant services 5.7 percent year-on-year, clothing and footwear 3.0 percent year-on-year and household goods and appliances 1.9 percent year-on-year," the brokerage said. Energy inflation picked up as petrol, diesel, LPG, CNG, and kerosene prices rose with global crude.
Outlook and Rate Hikes
With food prices dependent on monsoon distribution and El Nino risk, plus higher global food prices feeding through, ICICI Bank Global Markets expects inflation to average 5.0 percent in FY27, compared to the RBI's estimate of 5.1 percent. The recent dip in oil prices is a positive, but unless geopolitical risks ease quickly, rate hikes remain on the table.
