India faces stagflation risk as fuel hike offsets just 7-8% of under-recoveries; inflation may hit 6-7% in H2 FY27: Report 

Rising wholesale inflation and persistent crude oil pressures could push India’s retail inflation into the 6-7% range in the second half of FY27, according to a recent report by Systematix Institutional Research, which cautioned that the economy may be entering a stagflationary phase marked by slowing growth, sticky inflation and rising external sector stress.

Dhananjay Sinha, CEO & Co-Head of Equities and Head of Research – Strategy & Economics at Systematix, said the recent ₹3 per litre fuel price hike is likely the beginning of a broader price correction cycle rather than a one-off adjustment.

“The latest ₹3 per litre fuel price hike, following the Prime Minister’s austerity appeal, is just the beginning of a larger correction. With WPI inflation surging, official CPI forecasts will soon align with the more realistic 6-7% range for 2HFY27,” Sinha said.

The report noted that the latest hike offsets only 7-8% of cumulative under-recoveries from nearly three months of unchanged fuel prices, with total losses estimated at ₹1.7–1.8 lakh crore. It expects several more rounds of fuel price hikes to recover past losses, especially with crude oil prices likely to remain above $100 per barrel.

According to the report, the combination of slowing growth, widening balance of payments (BoP) pressures and elevated inflation could complicate the Reserve Bank of India’s (RBI) policy outlook, potentially forcing a reversal of last year’s accommodative monetary stance. The brokerage also warned that the rupee could weaken beyond the ₹100-per-dollar mark.

The warning comes after wholesale price index (WPI)-based inflation surged to a 42-month high of 8.3% in April 2026, while fuel and power inflation jumped to 24.7%. Retail inflation also edged higher to 3.5%, with analysts expecting further upside as higher fuel prices feed through the economy.

The brokerage said the recent hike in petrol and diesel prices, announced after the Prime Minister’s call for austerity, is likely the beginning of a broader round of fuel price increases rather than a one-time adjustment.

Under such conditions, the agency warned that WPI inflation crossing the 10% mark is no longer a tail risk but an increasingly plausible near-term scenario.

“Several more rounds of hikes will be needed simply to recover past losses, and this is against the backdrop of crude potentially remaining anchored above $100 per barrel. Under these conditions, WPI inflation crossing the 10% mark is not a tail risk; it is a plausible and near-term base case,” the report said.

Adding to the macro risks, the agency warned that the spike in crude oil imports, which could rise by nearly $100 billion if prices sustain above $100 per barrel, may push India’s trade deficit toward 10% of GDP.

“The stagflationary dynamic is now unmistakable, and its transmission is uneven across sectors, which makes the aggregate picture more, not less, concerning,” the report added.

According to the brokerage, agriculture currently enjoys some support from healthy Rabi output and reservoir levels, but faces mounting risks from rising fertiliser prices, Gulf supply disruptions for urea and the threat of a deficient monsoon. With rural inflation rising faster than urban inflation, rural demand is becoming increasingly vulnerable.

The report further noted that industry and manufacturing sectors are bearing the brunt of supply-side pressures, as rising energy, logistics and raw material costs compress margins across chemicals, packaging, textiles, consumer goods, aviation and transport sectors.

“A slowdown in the private capital expenditure revival is a real risk if cash flows remain under pressure for an extended period,” the report said.