RBI raises inflation forecast to 5.1%, warns of oil-price pass-through and monsoon risks – Firstpost

The Reserve Bank of India (RBI) on Friday sharply raised its inflation forecast for the current financial year, warning that surging crude oil prices, rising input costs and weather-related risks could push consumer prices significantly higher in the coming months.

Announcing the outcome of the Monetary Policy Committee (MPC) meeting, RBI Governor Sanjay Malhotra said the central bank now expects consumer price inflation (CPI) to average 5.1 per cent in FY27, up 50 basis points from its previous projection of 4.6 per cent.

The revised forecast comes as the global economic environment deteriorates amid persistent conflict in West Asia, supply-chain disruptions and a sharp increase in energy prices.

“The adverse implications of the extended disruption in supply chains and elevated energy prices are reflected in the moderation of growth and increase in inflation projections from the April policy,” Malhotra said.

Despite the worsening global backdrop, the RBI kept the benchmark repo rate unchanged at 5.25 per cent and retained its neutral policy stance, arguing that it would be prudent to wait for greater clarity on the evolving inflation outlook.

Inflation expected to move closer to RBI’s tolerance band

While inflation has remained below the RBI’s medium-term target of 4 per cent in recent months, policymakers believe the benign phase may be coming to an end.

Headline CPI inflation stood at 3.4 per cent in March and 3.5 per cent in April, remaining below target despite global commodity shocks. The governor attributed this to the limited pass-through of higher international prices to domestic consumers so far.

However, that cushion is beginning to fade.

The RBI now expects inflation to accelerate through the year, with quarterly projections of 4.2 per cent in the first quarter, 5.1 per cent in the second quarter, 5.9 per cent in the third quarter and 5.4 per cent in the fourth quarter.

The forecast implies inflation could move close to the upper end of the central bank’s tolerance band later this year before easing as supply-side pressures moderate.

“While the baseline projections point towards headline inflation firming up towards the upper tolerance level in Q4 this year, the impact of the supply shock is expected to wane thereafter,” Malhotra said.

Crude oil emerges as biggest inflation threat

A key factor behind the RBI’s upward revision is the sharp increase in global crude oil prices.

The governor noted that the Indian basket of crude oil averaged around $110 per barrel over the past two months, substantially above the assumptions used in the central bank’s April policy review.

At that time, the RBI had assumed average crude prices of around $87-88 per barrel for the year.

The surge in oil prices has already started feeding into domestic inflation.

According to the RBI, the partial pass-through of higher global crude prices to retail petrol and diesel prices began in May. At the same time, prices of commercial LPG, industrial raw materials, chemicals, base metals, rubber and plastic products have also increased significantly.

These rising costs are expected to be passed on to consumers over time, creating broader inflationary pressures across the economy.

The impact is already visible in wholesale prices. The governor noted that wholesale price inflation jumped above 8 per cent in April as energy and input costs surged.

RBI warns of second-round inflation effects

Beyond higher fuel prices, the central bank expressed concern about so-called second-round inflation effects, where initial price increases begin influencing wage demands, inflation expectations and pricing decisions across sectors.

“Generalisation of inflation through second-round effects on expectations and wages is a distinct possibility warranting a close vigil,” Malhotra said.

Such effects are closely watched by central banks because they can make inflation more persistent and difficult to control.

The RBI said underlying inflation pressures remain relatively benign for now. Core inflation, excluding precious metals, remained stable at 3.7 per cent during March and April. However, the central bank expects core inflation to rise to 4.7 per cent on average during the current financial year.

Monsoon and El Nino add fresh uncertainty

Apart from energy prices, the RBI identified weather-related risks as another major source of concern.

The central bank warned that a projected deficiency in the southwest monsoon and the possibility of El Nino conditions could affect agricultural production, food supplies and rural demand.

“The outlook remains clouded due to the sub-normal southwest monsoon forecast and El Nino risks,” Malhotra said.

Food inflation has already begun edging higher, and any weather-related disruption could worsen price pressures later in the year.

However, the RBI said adequate foodgrain stocks and satisfactory reservoir levels provide some comfort and could help cushion the impact of adverse weather conditions.

Why the RBI still chose to hold rates

Despite raising its inflation forecast and acknowledging growing risks, the MPC unanimously voted to keep the repo rate unchanged at 5.25 per cent.

The central bank argued that considerable uncertainty remains regarding the duration of the West Asia conflict, the extent of supply-chain disruptions and the trajectory of global commodity prices.

The committee also noted that inflation has so far remained below target and that the full impact of higher energy costs is yet to become clear.

“Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge,” the governor said.

At the same time, the RBI emphasised that it remains data-dependent and will closely monitor whether supply-side pressures begin to become embedded in inflation expectations and the broader price structure.

For now, the central bank appears willing to tolerate a temporary rise in inflation while assessing the durability of the shock. But with oil prices remaining elevated and monsoon uncertainty looming, the room for policy flexibility may be narrowing.