India CPI inflation at 3.93%: SBI flags FY27 risks

Inflation stays under 4%, but the trend turns up

India’s retail inflation stayed below the Reserve Bank of India’s 4% target in May 2026, but the direction of travel has started to worry economists. Headline consumer price inflation (CPI) rose to 3.93% in May from 3.48% in April, according to SBI Research’s latest Ecowrap report. The report linked the rise mainly to higher petrol and diesel prices, an LPG supply squeeze and stronger imported inflation. While the headline number still sits just under the target, the drivers are becoming more broad-based. Fuel-led price pressures are also beginning to show up in transport and services linked to cooking fuel and food away from home.

SBI Research cautioned against expecting another rate cut in August, pointing to external shocks feeding into domestic prices. The view comes as global oil prices remain firm and concerns around US inflation keep financial markets alert to a higher-for-longer global rate environment. For India, the transmission often happens through a higher import bill and currency pressure, which then affects landed costs of energy and other inputs.

SBI Research: imported inflation is the key risk

SBI Research flagged imported inflation as one of the biggest concerns in the current inflation setup. Imported inflation climbed to 7.23% in May from 6.34% in April. Its weighted contribution to headline inflation increased by nearly 100 basis points to 2.43%, showing a stronger pass-through into CPI.

The report highlighted that exchange-rate movements and global supply-chain disruptions are increasingly showing up in domestic price data. It said the impact of exchange rate fluctuations and external shocks is “creeping into India’s CPI”. This matters because imported inflation can persist even when domestic demand is not overheating, making it harder for monetary policy to rely on a single month of below-target CPI.

Fuel and LPG: how the shock entered CPI

The immediate trigger for May’s uptick, as described by SBI Research, was a rise in fuel costs. The report said petrol and diesel prices increased by around ₹7.5 per litre in May following a surge in global crude prices. SBI estimated these fuel price hikes alone could add 35-40 basis points to domestic inflation.

Transport inflation surged by 176 basis points to 1.8% in May from near-zero levels in April, indicating a visible pass-through from fuel to transport-related components. SBI also linked the increase to a slight shortage of LPG supplies, which pushed up costs of cooked food items and hospitality services. These channels matter because they spread the impact beyond the direct “fuel and light” line item into services and food consumption patterns.

RBI outlook: FY27 inflation forecast raised to 5.1%

The Reserve Bank of India has also signalled a less comfortable inflation outlook. The RBI’s Monetary Policy Committee revised its CPI inflation forecast for FY27 upwards to 5.1%, which is 50 basis points higher than earlier estimates. The RBI attributed the change to concerns around global energy prices, elevated input costs and geopolitical uncertainty.

The quarterly projections suggest stronger pressures in the second half of the year. The RBI expects CPI inflation at 4.2% in Q1 FY27, 5.1% in Q2, 5.9% in Q3 and 5.4% in Q4. The profile implies that even if near-term inflation remains close to target, policy makers are preparing for a period where the headline rate could move meaningfully above 4%.

June MPC: SBI expects a hold, not a hike

SBI Research expects the RBI to keep interest rates unchanged at the June 3-5 Monetary Policy Committee meeting. It argued that inflation remains within the target range, even as risks rise from imported inflation, fuel price hikes, rupee depreciation and geopolitical uncertainties.

The report recommended a “hold” stance, with the RBI relying on targeted liquidity and currency-management measures rather than a policy rate hike. The logic is that the current inflation challenge is being driven largely by external factors, particularly geopolitical tensions in West Asia and rising crude prices, rather than domestic overheating.

Fuel price moves and the near-term inflation math

Separate economist commentary and SBI’s own estimates indicate the near-term impact could be visible quickly. Economists have warned that fuel price increases and higher import duties on gold and silver could push retail inflation to 5% by June. Over 11 days starting May 15, petrol prices increased by ₹7.38 per litre and diesel by ₹7.48 per litre, with some inter-city variation.

The government also raised import duty on gold and silver to 15% on May 13 to curb non-essential imports. DBS Bank’s Radhika Rao said that given the weight of petrol and diesel in the CPI basket, a 3-5% increase likely adds 0.15-0.25% to headline inflation, besides second-round effects. SBI Research estimated the immediate impact on CPI inflation at around 15-20 basis points during May-June 2026 and revised its FY27 inflation forecast to 4.7%.

Global oil, the rupee, and the import bill channel

India imports more than 85% of its crude oil needs, making the economy sensitive to swings in global crude prices. SBI Research noted that even an additional depreciation of ₹2 in the rupee raises the effective crude oil price and pushes up landed import costs. In such a setting, currency moves can quickly offset any temporary relief from earlier pricing decisions.

The import bill data in the report’s broader context underscores the linkage. After falling in March due to lower crude oil and gold imports, the import bill rebounded in April, rising 10% year-on-year. The oil import bill increased to $18.6 billion compared with an average of $13 billion in Q4 FY26, keeping the net oil import bill, after adjusting exports, at around $1 billion.

Wholesale inflation and input costs: what RBI is watching

The RBI has also highlighted rising costs across several sectors. According to Malhotra, prices of commercial LPG, industrial raw materials, chemicals, base metals, rubber and plastic products have increased. The RBI expects these higher input costs to eventually reach consumers as firms pass them on.

Higher energy costs and rising input prices pushed wholesale inflation above 8% in April, according to the Governor. While wholesale inflation does not map one-to-one into CPI, it often signals pipeline pressures that can later appear in retail prices, especially where businesses have limited ability to absorb costs for long.

Key numbers at a glance

RBI FY27 quarterly CPI projections

Why this matters for rates and growth

SBI’s warning on an August rate cut is rooted in how quickly external shocks are showing up in inflation components. When imported inflation rises and fuel pass-through is visible in transport and services, the risk is that inflation becomes less about one-off spikes and more about persistence across categories. That tends to make central banks cautious, even if the headline print is still below target.

SBI also quantified the macro sensitivity to oil. It estimated that every $10 per barrel increase in oil could widen the current account deficit by 30-35 basis points, raise inflation by 35-40 basis points, and reduce GDP growth by 20-25 basis points. If oil stays near $100 per barrel in FY27, SBI said growth may remain around 6.6%. The same report projected India’s economy to grow 6.6% in FY27 compared with an estimated 7.5% in FY26.

Conclusion: below-target inflation, but less room to ease

May’s CPI inflation reading of 3.93% kept India below the RBI’s 4% target, but SBI Research and the RBI are both pointing to a more uncertain road ahead. Imported inflation, fuel pass-through, currency sensitivity and rising input costs are emerging as the main pressure points.

With the June 3-5 MPC meeting expected to deliver a hold and with FY27 projections showing higher inflation in later quarters, the next policy steps are likely to depend on how quickly fuel and imported cost pressures settle and how the inflation path evolves into June and beyond.