India May-26 CPI Inflation gets very close to 4% median RBI target

HIGHER INFLATION – LAG EFFECT OF AN UNNECESSARY WAR

With the OMCs undertaking 4 rounds of petrol and diesel price hikes, the impact on CPI inflation was inevitable. There are still under-recoveries for OMCs, but further hikes look unlikely for now considering how sensitive fuel prices are in India. There have been certain positive signals in recent weeks. The US and Iran appear to be moving towards a truce, while Brent Crude prices have already fallen to $87/bbl. However, India has bigger concerns on inflation like the impact of El Nino on food prices and the lag effect of supply chain constraints on core inflation. Here is a break-up of the inflation basket.

Data Source: MOSPI

KEY DRIVERS OF HEADLINE INFLATION IN MAY-26

• Over the last 2 months; Food inflation has gone up from 3.87% to 4.78%. The bigger concern is that El Nino could cause a sharp rainfall deficit, hitting Kharif output.

• Transport inflation, a representation of fuel prices, has surged from 0.00% to 1.75% in the last 2 months. The complete lag effect may be evident only by next month.

• In terms of products; Potatoes, Peas, Cars, Cumin Seeds, and 2-wheelers curtailed inflation. Pressure came from silver, tomatoes, gold, ginger, and raisins.

• The area of concern remains gold and silver, which is part of Personal Care, but if you just look at personal effects (jewellery), the inflation is rather elevated at 60.78%.

WHAT IS THE OUTLOOK FOR CPI INFLATION FROM HERE?

Let us look at the impact of 4 critical baskets and the impact that it could have in the coming months on consumer inflation.

• Let us look at food inflation. Food is turning out to be a major swing factor, despite its reduced weightage in the new series. With a deficit monsoon this year due to the El Nino effect, the food inflation is expected to get more acute in the coming months.

• Oil has been the swing factor over the last 3 months. However, with prospects of the US and Iran entering a truce, Brent Crude has already fallen from $110/bbl to $87/bbl, although Brent Crude prices are likely to stabilize at a higher new normal.

• Core inflation has increased from 3.7% in the last couple of months to 3.9% in May 2026. The full impact of core inflation will be seen when supply chain constraints start to bite, and secondary price hikes by paints, chemicals, pharma etc start.

• If one looks at the break-up of rural and urban inflation; then rural inflation is higher in case of F&B, clothing, footwear, home fuels, home furnishings, transport, Communication, Recreation, and gold & silver. In other baskets, urban inflation leads. Overall, rural inflation at 4.25% in May 2026 is higher than urban inflation by 72 bps.

With the RBI holding status quo on rates in the June Policy meeting, the question is what happens in August? With the big flow initiatives like FNCR(B) and ECB, the RBI may wait out the August policy and, probably, hike the repo rates in the October monetary policy.