Inflation Risk – It could be bigger than expected in FY27

Recent estimates have pegged CPI inflation for India in FY27 at closer to 4.6%. That is sharply higher than the 2.1% reported in FY26. However, 4.6% may be too conservative; and actual inflation may be still higher.

Consumer inflation is up in March

The consumer inflation (CPI) for March 2026 was higher at 3.40%. This is already higher than the FY26 average of around 2.1%. For FY27, the actual inflation is expected to be closer to 4.6%; but it could even be higher. That is because, we have only seen the impact of higher crude prices on ATF, LPG and premium fuels. The real impact would be felt only when the prices of petrol and diesel are also raised. In addition, there is the secondary level inflation that is quite common when crude goes up. Sectors like paints, chemicals, petchem, plastics, pharma etc get impacted. Once these are factored in, the actual CPI inflation could be much higher than the expected 4.6% inflation.

WPI inflation is also showing worrying signs

While the CPI inflation is more of inflation experienced by consumers, the costs are determined by the WPI (wholesale) inflation. For March, the WPI inflation was sharply higher at 3.88%, compared to 2.13% in February. At 3.88%, the WPI inflation is at a multi-year high. WPI inflation has seen a spike across food, fuel, and manufactured products. With supply chain constraints caused by the war, many of the industries are starting to feel the impact of a spike in input costs. While companies will absorb some part of this price hike, they are going to pass on the rest to the buyers. That will raise consumer inflation sharply as a form of secondary effect. Fuel truly holds the key.

There are also other risks to inflation

Rising CPI inflation and WPI inflation may be the outcome of the war in the Middle East. The apprehension, however, is that even after the war ends or a truce is called, the impact on inflation may remain. That is because, there has been substantial damage to supply lines and the market will remain undersupplied. Also, oil companies in the Middle East may operate below capacity. In addition, there is also the risk of the El Nino effect playing out in India. Monsoons this year is pegged by IMD at 92% of long period average (LPA). That means; it will be a rather tough draught year for Indian agriculture. That is only going to exacerbate the price inflation situation in India in FY27.

What can the government do to curb inflation in FY27

In fact, the government has been taking several fiscal measures to reduce the impact of inflation. For instance, the sharp cuts in GST rates on most goods of mass consumption last year had a dual effect. Firstly, it boosted sales. Secondly, it automatically curbed inflation and helped the prices to stay under control in FY26. The government may not have too many other fiscal levers to handle higher consumer inflation. However, it does have the luxury of monetary measures. Most likely, the RBI will have to hike rates to ensure that the inflation does not get out of control. The timing is not yet clear; but we can surely look forward to rate hikes in FY27, if inflation spirals.