Key facts
- India's retail inflation reached 3.93% year-on-year in May.
- This is the highest rate recorded since the introduction of the 2024 base year series in January.
- The increase was primarily driven by higher costs in food and beverages, transport, restaurants, and personal care.
- Monthly inflation saw a significant rise of 0.8% in May, the quickest pace in 16 months.
- Rural inflation outpaced urban inflation, rising to 4.3% compared to 3.5% in urban areas.
India's retail inflation, measured by the Consumer Price Index (CPI), rose to 3.93% year-on-year in May, reaching its highest point since the introduction of the new 2024 base year series in January. This uptick was primarily fueled by increased costs in food and beverages, transport, restaurants, and personal care categories.
On a monthly basis, retail inflation accelerated by 0.8% in May, representing the fastest pace observed in 16 months. Economists anticipate that price pressures may intensify further in June, with projections from ICRA and India Ratings and Research suggesting CPI-based inflation could reach 4.5%, surpassing the Reserve Bank of India's (RBI) medium-term target midpoint.
The rise in transport costs reflects higher petrol and diesel prices, while increased commercial LPG cylinder rates and elevated customs duties on gold and silver also contributed to the overall inflation figures. Sakshi Gupta, principal economist at HDFC Bank, noted that a recent Rs 29 increase per LPG cylinder could add approximately 6.3 basis points to headline inflation in June.
Rural inflation continued to rise at a faster pace than urban inflation. Food inflation in rural areas increased to 4.8% in May from 4.2% in April, and overall rural inflation climbed to 4.3% from 3.7%. Telangana reported the highest inflation rate among states at 6.2%.
In response to the inflationary pressures, economists suggest the RBI might consider policy rate hikes from October or December onwards, as inflation is expected to approach the upper limit of the 2-6% target band in the latter half of the fiscal year. The RBI had previously kept its policy rate unchanged at 5.25% in its June meeting. Key indicators to monitor include currency, liquidity, and crude oil prices.