RBI Raises FY27 Inflation Forecast To 5.2% As Oil, Food Prices Add Pressure

The Reserve Bank of India (RBI) on Wednesday raised its inflation forecast for FY27 to 5.2% from 5% earlier, flagging pressure from food prices, a deficient southwest monsoon and volatile international oil prices.

Inflation is expected to climb over the coming quarters, with the RBI projecting consumer price inflation at 4.9% in Q2FY27 before rising to 6% in the third quarter. The Q4 estimate has been raised to 5.7%, while inflation for the first quarter of FY28 is now seen at 5.6%.

The revised outlook came alongside a 25-basis-point increase in the repo rate to 5.50%, the RBI's first rate hike since February 2023. The Monetary Policy Committee also changed its stance from neutral to calibrated tightening.

RBI Governor Sanjay Malhotra said headline inflation is expected to average close to 5.8% over the next three quarters, as price pressures spread across food and other parts of the consumer basket.

Oil, Food Prices Weigh On RBI Inflation Outlook

The RBI expects inflation to pick up sharply during the second half of the financial year, with food and energy prices among the risks to the outlook.

“The near-term outlook on inflation points towards continued pressures from supply side, on account of the deficient Southwest monsoon, El Nino conditions and high volatility in international oil prices,” Malhotra said.

Food inflation is also no longer confined to a handful of items, with the central bank pointing to pressure across a broader set of commodities.

“Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil… In addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket,” Malhotra said.

The RBI now sees inflation at 4.9% in the second quarter before it touches 6% in Q3, the upper end of the central bank's tolerance band. Inflation is then projected at 5.7% in the fourth quarter.

The pressure is expected to extend into the next financial year, with the Q1FY28 inflation estimate raised to 5.6% from 5.3%. Core inflation is projected at 4.4% for FY27.

RBI Sees Inflation Rising In Coming Quarters

The latest numbers mark a reversal from the RBI's August assessment, when the central bank had lowered its FY27 inflation forecast to 5%.

Since then, risks around food and energy prices have increased. A deficient southwest monsoon and El Niño conditions have added to concerns over food supplies, while swings in international oil prices remain another source of uncertainty for domestic inflation.

The central bank is also seeing signs that price pressures are becoming more widespread, reflected in higher core inflation and an increase across a larger share of the CPI basket.

The tougher inflation outlook comes even as economic growth remains firm. The RBI on Wednesday raised its FY27 real GDP growth forecast to 7.1% from 6.7%.

Stronger growth alongside rising inflation risks provided the backdrop to the MPC's decision to raise the repo rate from 5.25% to 5.50%.

Food prices, weather conditions and international oil prices will now remain key to the inflation path, particularly as the RBI expects CPI to reach 6% in the third quarter.

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