Inflation: No cause for immediate alarm | Photo Credit: Thanadon Naksanee

The outlook on inflation is far from sanguine, and yet it cannot be seen as cause for alarm. The retail inflation print of 4.4 per cent in June was not unexpected. It is largely the result of the Iran war, and so far is not broad-based — never mind even if the headline number happens to be an 18-month high. It could edge up further, but whether that leads to a spike in inflationary expectations would depend on the trajectory of the ongoing war. As far as global bond markets and central banks are concerned, India need not entirely peg its actions on their decisions. Quite apart from the macros being sound, the Reserve Bank of India and the Centre have taken steps to shore up capital flows — creating space for independent monetary policy.

It is worth noting that average inflation for the first quarter of FY27 is at 3.9 per cent, below the RBI’s projection of 4.2 per cent for the quarter. The RBI has now begun to accord more importance to core inflation which excludes the more volatile food and energy prices. Core inflation held steady at 3.9 per cent in June. If the influence of the sharp increase in gold and silver prices is removed from core inflation, the reading is at a much benign 2.5 per cent. These numbers are likely to lend comfort to the RBI. Besides petrol and diesel, the increase in prices of LPG cylinders and piped natural gas weighed on consumer wallets and made services of restaurants and hotels pricier. Inflation in transport was high at 4.3 per cent, which pushed the prices of all other goods and services, including food items. The higher food inflation of 5.3 per cent was also influenced by higher cost of fertilizers and the seasonal spike in vegetable prices in June. Higher prices of oil and fat in global markets pushed domestic edible oil prices higher.

However, there is uncertainty regarding the trajectory of CPI in the coming months. Though crude oil prices are below their recent peaks, they are still almost 20 per cent higher than the pre-war price level. While the deficit in monsoon rainfall has narrowed in July and kharif sowing is expected to improve, food inflation can continue to apply upward pressure on headline inflation. RBI’s CPI projections of 5.1 per cent for the second quarter, 5.9 per cent for the third quarter and 5.4 per cent for the fourth quarter of FY27 have taken these heightened uncertainties into account. However, inflation in gold and silver prices is expected to ease in the coming months since prices are drifting lower and the rally in precious metals occurred in the second half of 2025. Given that the CPI is still below the upper band and the current spike in mainly caused by supply side challenges, the RBI can maintain a status quo in policy rate for now.

A status quo is desirable in view of the Centre’s plans to ramp up spending to deal with war-related issues. Businesses could do with some relief in borrowing costs. Monetary authorities, however, will have to be nimble and data-dependent.

Published on July 16, 2026