Fuel price hikes could push inflation to 5 pc; RBI to be on wait-and-watch mode for now: Economists

Fuel price hikes and higher import duties on gold and silver could push retail inflation to 5 per cent by June, but the RBI will wait and watch till the impact of the fuel price hike settles in before tightening interest rates in the second half of the fiscal year, economists said.

Over a period of 11 days, starting May 15, petrol prices have been increased by Rs 7.38/ltr and diesel prices by Rs 7.48/ltr with some inter-city variation. These price hikes will directly cascade into impacting prices in sectors where petrol and diesel are used as inputs such as transport and storage and to some extent, electricity.

Besides, the Government on May 13 had hiked import duty on gold and silver to 15 per cent to curb non-essential imports.

“After an overall increase averaging about Rs 7.5/ltr in petroleum products, CPI inflation would go up by about 75 basis points. In May 2026, CPI inflation may thus be in the range of 4-4.5 per cent and June CPI may be in the range of 4.5-5 per cent,” EY India Chief Policy Advisor D K Srivastava told PTI. The CPI inflation data for May is scheduled to be released on June 12.

“Since the increase in CPI is cost-driven, adjustments in repo rate may have limited effect in containing inflation. RBI may like to wait until the fuel price hike settles down and examine its impact over a quarter before taking a decision. However, If CPI inflation crosses the level of five per cent and shows upward momentum, RBI may start tightening interest rates,” Srivastava said.

India Ratings & Research Director Megha Arora said she expects June CPI to surpass four per cent but remain within the RBI’s upper tolerance band of six per cent.

Economists expect the RBI’s monetary policy committee (MPC) to persist with its “neutral pause” in the June 5 meeting, keeping all policy rates unchanged.

Since the last MPC policy announcement on April 8, but WPI inflation has flared up to 42-month high of 8.3 per cent in April, reflecting the global commodity price pressures. With inadequate passthrough, retail or Consumer Price Index (CPI) based inflation rose modestly to 3.48 per cent in April.

With the petrol, diesel price hikes beginning mid-May, the CPI inflation print for May is expected to show uptick with full impact being visible in June CPI inflation. The RBI mainly takes into account CPI inflation while deciding on monetary policy rates.

“While we believe there will be no policy rate action in June, we are incrementally getting worried that as this uncertain backdrop lingers, spillover effects to transportation fare, other raw material costs and finally output prices may make the inflation outcome in 2HFY27 (October-March) difficult to digest, necessitating a rate hike,” Barclays India Chief Economist Aastha Gudwani said.

In the April 2026 Monetary Policy Report, the RBI’s base case assumed crude oil at $85/bbl for its growth and inflation forecasts. With reality decisively shifting to the $95/bbl scenario, Barclays expects the RBI to revise its FY27 inflation forecast from 4.6 per cent to 5 per cent and cut its growth forecast to 6.7 per cent (from 6.9 per cent) after the June 5 MPC meeting.

India Ratings & Research Director Megha Arora said based on the four fuel price hikes so far, June CPI inflation is likely to be higher by around 38 bps, with an upside risk from further passthrough. June CPI is likely to surpass 4 per cent but remain within RBI’s upper tolerance band of 6 per cent.

The RBI has the mandate to keep inflation at 4 per cent with a tolerance band of 2 per cent on either side.

Crisil Principal Economist Dipti Deshpande said the rating agency expects average inflation at 5.1 per cent in current fiscal year.

“Inflationary pressures at present are largely supply-driven, stemming from elevated fuel and input costs, along with a weaker rupee. As such, the MPC may choose to look through these supply-side pressures in its policy assessment. However, the committee is likely to remain watchful of the risk of spillovers to household inflation expectations, and the possibility of second-round effects leading to broader generalisation of price pressures,” Deshpande said.

ICRA Chief Economist Aditi Nayar said the fuel price hike will have a minor impact on the May CPI inflation figure, but transmit more widely into the number for June.

“We now forecast the FY27 baseline CPI inflation at 5 per cent, presuming crude oil averages $95/barrel. We do not expect an immediate rate hike in the June 2026 policy review, but expect it to be more backended in H2 FY27,” Nayar said.