El Niño, weak monsoon to keep inflation elevated; India Ratings sees July CPI at 4.9%

Food prices driven by El Niño-linked weather disruptions and a weak monsoon pushed both wholesale and retail inflation higher in June, with India Ratings and Research (Ind-Ra) warning that price pressures are likely to intensify further in July despite remaining within the Reserve Bank of India's (RBI) tolerance band.

In a report, released on Wednesday, the rating agency expects wholesale price index (WPI)-based inflation to rise to around 10% in July, largely due to a favourable base effect, while consumer price index (CPI)-based inflation is projected to increase to 4.9%, remaining below the RBI's upper tolerance limit of 6%.

"The upward trajectory in inflation is expected due to the El Niño effect on food prices, though some ease could occur in July. However, cumulative rainfall has been 14% below normal, while kharif sowing was 16% lower year-on-year till July 10," said Megha Arora, Economist and Director at Ind-Ra.

The agency also flagged renewed volatility in crude oil prices following the latest escalation in the West Asia conflict, expecting Brent crude to remain around $85 per barrel or higher in the coming weeks, adding further pressure on inflation.

Ind-Ra expects the RBI to trim its FY27 CPI inflation forecast by 10 basis points to 5%. However, it believes the central bank will maintain a status quo on policy rates in the August monetary policy review, while closely monitoring crude prices, monsoon progress, the rupee and liquidity conditions.

Wholesale inflation accelerated to 9.87% in June, up from 9.68% in May, led by a broad-based rise in primary articles. Food inflation at the wholesale level climbed to a 17-month high of 5.5%, reflecting the impact of weather-related disruptions and an unfavourable base.

Primary articles inflation rose to 7%, while fuel and power inflation moderated to 27.41% from 30.33% in May as crude oil prices temporarily eased during a brief lull in geopolitical tensions. Manufactured products inflation remained unchanged at 7.48%, with higher food prices offsetting softer crude-linked input costs.

Retail inflation rose to 4.38% in June from 3.93% in May, crossing the RBI's medium-term target of 4%, driven by higher food, transport, and precious metals prices.

Transport inflation more than doubled to 4.31% from 1.75% after the pass-through of petrol and diesel price hikes announced in mid-May, while restaurant and accommodation services inflation increased to 6.91%, reflecting higher commercial LPG costs.

Food inflation accelerated to 5.32%, with prices rising across almost all major food categories except vegetables. Inflation in rice and pulses, two key kharif crops, increased sharply as acreage remained below last year's levels. Paddy sowing was down 8.6% year-on-year and pulses acreage declined 23.3% as of July 10.

Ind-Ra cautioned that if the shortfall in sowing persists, food inflation could remain a key upside risk to headline inflation in the coming months.