New Delhi: India’s economy, which grew a stronger-than-expected 7.8% in the June quarter, is facing fresh headwinds as food and fuel prices continue to surge while price pressures start trickling into the broader economy. Both retail and wholesale inflation accelerated sharply in August, the two datasets released on Monday showed, with the broader rise fanning expectations of a rate hike sooner than later.
Consumer price inflation rose to a 20-month high of 4.82% in August from 4.45% in July, breaching the Reserve Bank of India’s 4% midpoint target for the third consecutive month. Wholesale price inflation, meanwhile, inched closer to the double-digit mark, rising to 9.92% from 9.78%, as geopolitical tensions pushed up energy costs and food prices stayed firm.
The simultaneous rise in the two inflation gauges points to intensifying price pressures across the economy. The risks are particularly pronounced as the conflict in West Asia keeps crude oil prices elevated and an El Niño-influenced, below-par monsoon threatens the summer crop that could put further pressure on food prices.
At its last meeting held on 3-5 August, RBI’s monetary policy committee retained the repo rate at 5.25% and maintained a neutral stance. The central bank has projected India’s FY27 growth at 6.7% and the average headline inflation at 5%.
Food inflation in the consumer price index (CPI) rose to 5.95% in August from 5.52% in July, while wholesale food inflation (WPI) crossed 7%, up from 6.6% in the previous month. Under the wholesale index, inflation in crude petroleum and natural gas surged to 34.41% from 26.99%, pushing up fuel and power inflation to 22.93% from 20.05%.
“The uptick was broad-based, driven by 10 of the 12 divisions, (with) food and beverages, housing, water, electricity, gas and other fuels, and information and communications divisions accounting for a bulk of the 37-basis-point uptick” in headline retail inflation in August, said Aditi Nayar, chief economist, head-research and outreach at Icra Ltd.
The pressure could intensify in the coming months. Nayar expects food and beverage inflation to cross 7% by October and headline retail inflation to breach 5% in September, before rising to around 6% in October-November.
Some experts see the inflation chart less spiky. “Going forward, we expect headline inflation to stay range-bound near 4.5-5.0%, with food as the key swing factor amid uneven monsoon and El Niño-related uncertainty,” said Rajeev Sharan, head of research, Brickwork Ratings. “The main risk is that high wholesale food and input costs eventually push up retail prices, alongside any rise in crude oil or fresh volatility in vegetable prices.”
The prolonged West Asia conflict has emerged as a key risk to India’s inflation outlook. Brent crude oil prices have surged sharply, breaching $100 a barrel mark this month amid fresh concerns over disruption to oil supplies and shipping through the Strait of Hormuz. Higher crude prices raise the cost of transport, logistics and industrial inputs, creating a risk that elevated wholesale prices eventually feed into consumer prices.
Wholesale inflation in manufactured products was at 8.29% in August, while primary articles inflation rose to 8.52%. Such sustained input-cost pressures could squeeze corporate margins or prompt businesses to pass on higher costs to consumers.
On the retail inflation side, silver, gold, diamond and platinum jewellery, apart from food items such as onion, ginger and garlic were among the items that saw the strongest inflationary pressure in August. Personal care, social protection and miscellaneous goods and services, as a group, saw inflation at 15.17%, up from 14.77% in July.
Restaurant and accommodation services were up 8.38% in August from 7.72% in July, while housing was at 2.61% from 2.22% in July.
The gap between retail and wholesale inflation remains unusually wide, reflecting differences in the composition of the two indices but also indicating that businesses have so far absorbed part of the increase in input costs, rather than passing it on fully to consumers.
Elevated wholesale inflation feeds into retail prices, as businesses and other intermediaries pass on rising input costs to final consumers. While RBI officially aims to keep retail inflation within its 2-6% range, it closely tracks all other price indicators as well for cues on which way the broader price pressure in the economy is moving.
Time for a policy turn?
At their last month’s review, the central bank’s monetary policy committee members said they would keep an eye on generalization of price pressures to decide on future rate actions, according to the minutes of their meeting.
Devendra Pant, chief economist at India Ratings & Research, said while generalized inflation pressures are modest for now, there are risks of higher food, fuel and other input costs trickling into broader inflation.
And hence, all eyes on the central bank as it will look to defend its inflation target.
“With CPI inflation coming close to 5%, the RBI may have to review its policy stance as well as policy rate in its next monetary policy review meeting in October 2026, said D.K. Srivastava, chief policy advisor at EY India, adding that the government had “successfully limited” the passthrough effect of fuel prices linked to global pressures.
The rate-setting panel is slated to meet next on 5-7 October.
A rise in core inflation, which shows a broader price trend, is sending cues. “Core inflation, excluding food and fuel, is estimated near 4.3%, kept elevated by gold and silver prices amid geopolitical risk aversion and firm crude-linked transport costs,” said Rajeev Sharan, head of research at Brickwork Ratings. Core inflation was at 3.9% in July.
This rise points to a stronger case for an imminent rate hike, with India’s peers Indonesia and the Philippines having already moved on the same, largely due to the fuel price rise.
“Our base case is that a rate hike could materialize in the December 2026 meeting, particularly if there is evidence of a generalization in inflationary pressures and crude oil prices sustain at elevated levels,” said Nayar of Icra.
A rate hike could come even sooner. “If crude oil prices remain elevated in the run-up to the upcoming MPC meeting, hinting at an impending upward revision in the retail selling prices of petrol and diesel, which could percolate into generalized price pressures, then the expected rate hike could get pre-poned to October 2026 from December 2026,” she added.