India's inflation trajectory is giving the Reserve Bank of India more room to hold rates through Q1FY27, but food and fuel risks could still flip the script in H2. Yes Securities expects headline CPI for Q1FY27 to undershoot RBI's 4.2 per cent forecast as the May print at 3.93 per cent y-o-y and benign base effects keep the average low.

However, building momentum in vegetables, core services and pump prices, plus the looming El Nino threat, means RBI will likely stay "data-dependent" rather than front-load any August rate hike. Headline CPI for May rose to 3.93 per cent y-o-y from 3.48 per cent in April, driven by a 0.75 per cent MoM gain -- the strongest since April.

Transport led with petrol/diesel pump prices up 1.9 per cent MoM, while Restaurant & Accommodation Services rose 1.8 per cent and Personal Care 1.2 per cent. Core CPI also inched higher to 3.9 per cent y-o-y from 3.7 per cent in April, with sequential momentum picking up to 0.50 per cent from 0.35 per cent.

Food inflation is the key watchpoint. Food and Beverages inflation accelerated to 4.5 per cent y-o-y from 4.0 per cent in April, with MoM surge of 0.9 per cent vs 0.2 per cent earlier, according to the brokerage.

Vegetables reversed months of deflation with a 2.45 per cent MoM jump. Tomato prices spiked 25.6 per cent MoM, potato 4.5 per cent and onion 2.10 per cent. Ready-made food also accelerated to 1.6 per cent MoM from 0.7 per cent.

While fruits and nuts saw a 0.45 per cent MoM degrowth, "rising risks from food inflation, particularly in the context of El Nino, continue to warrant concern going forward," the report noted.

Fuel inflation turned positive at 0.4 per cent MoM after the print came in negative to -0.05 per cent in April. Annually, it stood at 0.8 per cent y-o-y. Electricity remained in deflation at -3.1 per cent y-o-y, but coal, kerosene and biogas provided upside. R

BI has already revised oil assumptions to $95/bbl for policy calculations, vs $85 earlier, and under-recoveries of Rs 6/litre on petrol and Rs 30/litre on diesel suggest "one cannot rule out further increases in pumphead prices".

Core pressures are also creeping up. Personal Care & Miscellaneous rose to 18.5 per cent y-o-y, driven by silver jewellery up 155.2 per cent y-o-y and other precious metals up 40.9 per cent after higher import duties from May 13. Restaurant & Accommodation services hit 5.7 per cent y-o-y vs 4.2 per cent earlier.

With May at 3.93 per cent, June would need to breach 5 per cent for Q1FY27 to meet the RBI's 4.2 per cent estimate. Yes Securities' June projections suggest an undershoot. That gives RBI comfort to delay hikes. "While we had earlier indicated the possibility of a rate hike in the August meeting, we now assign a lower probability to that outcome and reiterate that the RBI will remain data-dependent," the report said.

Brent's fall to $86/bbl and possible US-Iran deal add uncertainty, making the RBI likely to assess second-round effects before acting.

Published on June 13, 2026