Inflation seen at 5% in FY27, 50-75 bps rate hikes likely as food and fuel risks build: Report

New Delhi: Inflation is headed higher to 5.0 per cent in FY27 with core at 4.6 per cent, ICICI Bank Global Markets said, as West Asia conflict and a below-normal monsoon keep upside risks alive. The brokerage now sees a case for policy rates to be hiked by 50-75 bps, with the MPC already acknowledging higher H2 estimates.

"Inflation moved to 16-month high," ICICI Bank Global Markets noted in its June 12, 2026 report. CPI rose to 3.94 per cent YoY in May from 3.48 per cent in April, slightly below the firm's 4.05 per cent estimate but still showing broad-based pressure. Food inflation accelerated to 4.8 per cent YoY from 4.2 per cent in April, core to 3.9 per cent from 3.7 per cent, and energy to 1.9 per cent from 0.4 per cent.

Read more: Inflation in June quarter likely to undershoot RBI forecast, rate hike probability drops ahead of monsoon risks


Looking ahead, the brokerage flagged the conflict as a key risk.

"The ongoing uncertainty around the resolution of the conflict could continue to impart an upside-bias to the inflation, with second-round impact of higher input costs seen across household items, appliances and other segments," ICICI Bank Global Markets said. A below-normal monsoon at -10 per cent of LPA adds another layer: rain-fed crops like coarse cereals, pulses, oilseeds and spices face production risk, while cereals remain better protected due to irrigation and stocks.

Food momentum is already turning. Vegetables inflation jumped to 5.7 per cent YoY in May, highest in 10 months, after five months of contraction. Tomatoes surged 26 per cent MoM, cauliflower 12 per cent MoM, cabbage 11 per cent MoM and potato 4.5 per cent MoM due to extreme heat. Eggs rose 2.6 per cent MoM, ready-made products 1.5 per cent MoM, milk and dairy 0.9 per cent MoM, and edible oils 0.8 per cent MoM. On YoY basis, oil and fats and fresh meat both ran at 9.5 per cent, fruits and nuts 8.2 per cent, fish and seafood 7.5 per cent, and spices and seeds 6.8 per cent.

Core pressure is also firming. "Core inflation excluding jewelry rose to 2.4 per cent YoY from 2.2 per cent YoY given rising prices across restaurant services 5.7 per cent YoY, clothing and footwear 3.0 per cent YoY and household goods and appliances 1.9 per cent YoY," the brokerage said. Energy inflation picked up as petrol, diesel, LPG, CNG and kerosene prices rose with global crude.

Read more: India's retail inflation quickens to 3.93% in May amid high food & fuel prices

With food prices dependent on monsoon distribution and El Nino risk, plus higher global food prices feeding through, ICICI Bank Global Markets expects inflation to average 5.0 per cent in FY27 versus RBI's 5.1 per cent. The recent dip in oil prices is a positive, but unless geopolitical risks ease quickly, rate hikes remain on the table.