A Bank of Baroda report flags risks to India's inflation in FY27 from fuel price pass-through and weather issues, despite April's headline inflation being below the 4% target. Food prices and geopolitical tensions are key concerns.
The pass-through of rising fuel prices to consumers needs to be closely monitored as weather-related risks costs could also put upward pressure on inflation in FY27, according to a report by Bank of Baroda. India's headline Consumer Price Index (CPI) inflation in April has remained below the Reserve Bank of India's 4 per cent target level despite global uncertainties and rising geopolitical tensions. It added that globally, food prices are showing upside risks due to elevated energy costs, making domestic inflation trends vulnerable in the coming months.
Inflation Trends and Drivers
"Thus, the pass through to domestic prices needs to be monitored closely, at a time when weather-related vagaries are posing upside risk to inflation in FY27," the report said. CPI inflation increased marginally in April 2026 but remained below the 4 per cent target level. But the report stated that the inflationary pressures have continued to build up on the food inflation front. Among food categories, vegetables, pulses, edible oils and protein-based items were identified as the major drivers of rising inflation.
Weather Risks and Core Inflation
The report also highlighted that weather-related challenges, such as heatwave conditions and the expected El Nino phenomenon, could further impact food prices and agricultural output. "Monitoring is required as weather-related vagaries persist, in terms of heatwave conditions and expected El Nino. Hence, food inflation trajectory needs to be monitored closely," it noted.
The report added that the trajectory of core inflation currently does not pose a significant risk as demand-side pressures remain largely contained. Lower gold prices are also helping keep core inflation under control, according to the report. However, it cautioned that restaurant and hospitality services could witness some inflationary pressure.
Economic Outlook
Bank of Baroda's in-house Economic Consumption Index (BoB ECI) showed a pickup of 1 per cent year-on-year in May 2026, based on data available till May 11. "Our in-house BoB ECI is showing a pickup in May'26 (till 11 May) at 1 per cent, YoY. Thus, watchfulness is required about the evolution of the food inflation trajectory in FY27," the report stated.
The report further said that inflationary risks remain tilted to the upside unless the ongoing war situation eases. It noted that while India has remained relatively insulated from major inflation shocks so far, rising energy costs and weather-related disruptions remain key areas of concern for policymakers and markets going forward. (ANI)
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