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May CPI inflation at 3.9% YoY rose 45bps above Apr-2026 but surprised modestly on the downside. That said, both food and core inflation firmed up: core +40bps to 3.8%, led by transport, restaurant prices (amid LPG constraints), and silver jewellery, and food +50 bps to 4.5%. Though supply-driven pressures, and seasonal and rain-disruption-led food prices pose upside risks, demand-side inflation measures remain muted at ~3%. With oil prices (incl. Mar-2027) tending down toward US$80/bbl, upside risks are limited to weather. We expect the MPC to stay on hold in Aug and note that markets have also sharply repriced hike expectations lower, esp. given policy measures to support the INR.
May retail inflation (both headline and core) jumps 45bps vs. Apr-26
Headline inflation in May-26 jumped to 3.9% YoY vs 3.5% earlier but was 10bps below expectations. The 45bps increase vs. Apr was led by higher food prices and a 40bps rise in core inflation (3.8% YoY). Higher core was driven by higher transportation costs, rise in restaurants’ prices (5.7% vs. 4.2% in Apr) as supply of commercial LPG was constrained, and a spike in silver jewellery. Seasonal patterns show that food prices rise 7% (median) in the May-Nov period (FY26 an exception).
Demand led inflation measures suggest underlying price pressures <3%
Our preferred core indicator suggests that demand side inflation is at 2.9%. The underlying price pressure captured by core goods (ex-gold and silver) and core services also remains muted. However, we expect our measures to converge to core inflation over time for two reasons: retail fuel prices maybe hiked by another Rs. 5-10/L and higher than median food inflation will pull median like inflation measures higher.
Despite upside risks to inflation vs. target, MPC likely to stay on hold in Aug-26
The MPC in June raised its FY27 inflation forecast by 50bps to 5.1% highlighting risks from higher food and energy prices (one-time effects, including the fall in INR). We believe the capital measures announced by the RBI and the govt. may stem the panic around INR. Markets now assign a 39% probability to an Aug MPC hike—down sharply from 86% on 5 June. This repricing comes despite the ECB’s rate hike yesterday, with markets still pricing an 85% chance of another ECB move by end-October and a 96% likelihood of a BoJ hike this week. While oil prices have corrected, and Mar-2027 is back to US$80/bbl, uncertainty remains on when the Iran war ends; we believe weather is also a risk factor.
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