India's retail inflation breaches RBI’s midpoint target, rises to 4.38% in June

India’s retail inflation accelerated to 4.38% in June, led by higher food and fuel prices, surpassing the Reserve Bank of India’s 4% midpoint target for the first time since January 2025, according to provisional data released by the ministry of statistics and programme implementation on Monday.

Inflation, as measured by the Consumer Price Index (CPI), exceeded the median estimate of 4.2% forecast by 18 economists in a Mint poll, as the full-month impact of petrol and diesel price hikes and firmer food prices came into effect.

Food inflation, a key constituent of the consumer price index, stood at 5.32% in June, up from 4.78% in May and 4.20% in April.

“The uptick was primarily driven by higher food and fuel prices,” said Sujan Hajra, chief economist and executive director at the Anand Rathi Group. “Fuel inflation edged up to 2.0% from 1.7%, reflecting the recent increase in global crude oil prices. Looking ahead, food inflation remains vulnerable to weather-related risks, including the possibility of El Niño affecting agricultural output.”

“In addition to food items, the non-food component may also exert pressure on the headline CPI print in the month, partly owing to the passthrough of higher fuel prices into prices of other items,” said Aditi Nayar, chief economist at Icra Ltd. “Overall, Icra expects the YoY CPI inflation to harden to ~4.6% in July 2026.”

Although inflation remains within the RBI’s tolerance range of 2% to 6%, a further rise in prices may push the central bank to increase policy rates, which could suppress growth in the coming quarters. In June, the RBI revised its inflation projection upwards to 5.1% (from 4.6% earlier), citing twin risks arising from an expected below-normal monsoon amid El Niño conditions and elevated energy prices.

Status quo on policy rate

Nayar said Icra expects the RBI’s Monetary Policy Committee (MPC) to maintain status quo on the policy rate at its meeting in August.

“While the material easing in crude oil prices has reduced the likelihood of an early rate hike, the renewal of tensions in West Asia warrants some caution. Additionally, more clarity is needed on the monsoon turnout, which would only be available later during the monsoon season. Consequently, any rate hike(s) is likely to be back ended in the fiscal,” she added.

“Given the evolving inflation dynamics, we expect the MPC to remain watchful and maintain a data-dependent approach before taking any further policy action,” said Hajra.

Silver, gold, diamond and platinum jewellery as well as vegetables such as tomato, ginger and raisin were among the items that had the strongest inflationary pressure. Potato, peas, cumin, motor car, jeep, motorcycles and scooters remained the top items with low all-India inflation, the data showed.

Inflation was the highest in the southern states of Andhra Pradesh, Telangana, Tamil Nadu and Karnataka as well as Madhya Pradesh and Odisha. It was the lowest in Delhi, Mizoram, Tripura, Meghalaya and Nagaland.

Personal care, social protection and miscellaneous goods and services as a group had the highest inflationary effect at 16.72% against 18.46% in May. Restaurant and accommodation services prices rose 6.91% in June.

Crude oil prices moderated last month after a peace deal between the US and Iran, allowing inflation to soften for transport services to 4.31% in June against 7.63% in May. However, with the US and Iran resuming attacks, oil prices have started rising again.

GDP growth

The conflict in West Asia has weighed on India’s economy, prompting a slump in the currency and raising stagflation risks. However, gross domestic product (GDP) growth in Q4 remained firm at 7.8%, taking the FY26 growth rate to 7.7%.

India’s growth is expected to moderate in the current fiscal. According to the RBI, GDP growth in FY27 is expected to moderate to 6.6% (from 6.9% estimated in April), a view shared by the World Bank, which also pegged India’s GDP growth at 6.6% this fiscal year. The Asian Development Bank, which projected India’s growth at 6.9% this fiscal year in April, has downgraded the forecast to 6.6% for FY27.

The latest CPI data can't be compared with the year-ago period because the index was reset in January. Retail inflation was recorded at a revised 2.74% in January, marking the debut of the new series with 2024 as the base year. Prices rose by 3.21% in February, 3.4% in March, 3.48% in April and 3.93% in May. Inflation under the old CPI series, with 2012 as the base year, was 1.33% in December and 0.71% in November.

The new inflation index is built on spending patterns captured in the 2023-24 Household Consumption Expenditure Survey. The recalibrated weights for index components have pushed up India’s headline inflation readings modestly, with the share of core items rising about 10 percentage points and volatile food prices getting a smaller say.

The new series increases the share of housing, reshaping inflation measurement, easing volatility and altering how the RBI interprets headline inflation trends. Housing inflation stood at 2.10% last month against 2.12% in May, 2.15% in April, 2.11% in March and 2.11% in February.

Policymakers now have a more up-to-date basis for assessing real incomes, consumption trends and purchasing power.

The RBI kept interest rates unchanged at its meeting on 5 June, striking a cautious tone as it monitored the impact of surging oil prices on the economy and pledges to curb excessive currency moves.

The central bank’s six-member MPC voted unanimously to keep the benchmark repo rate at 5.25% and retain a neutral policy stand, indicating that it is in a wait-and-watch mode.