India inflation risks mount on renewed US-Iran tensions, El Nino

India’s stronger-than-expected inflation reading for June has left policymakers facing a more uncertain outlook, with renewed tensions around the Strait of Hormuz threatening to push up oil prices and a developing El Niño raising the risk of higher food costs.

Consumer prices rose 4.38 per cent from a year earlier in June — rising above the Reserve Bank of India’s target for the first time in nearly a year and a half as higher food and fuel costs filtered through the economy. Yet, a majority of economists expect the central bank to keep rates at 5.25 per cent in 2026, saying there’s still little evidence price pressures are broadening.

That outlook is being tested by President Donald Trump’s decision to reinstate a blockade of Iranian ships transiting the Strait of Hormuz, reviving concerns over energy supplies for the world’s third-largest oil importer. 

“Oil prices have started to increase once,” Sameer Narang and Jyoti Sharma of ICICI Bank wrote in a note. “This has added an element of uncertainty to inflation as well as growth.”

Core prices, ex-gold and silver, are inching up too, though they remain at 2.5 per cent. Narang and Sharma estimate this measure to nudge above 4 per cent towards the end of the year — becoming a potential trigger for RBI to raise rates by 50 basis points “once this inflation gauge sustainably moves above 4 per cent,” the duo said. 

The RBI targets inflation at 4 per cent, with a tolerance band of 2 per cent to 6 per cent.

India’s retail fuel prices remain elevated following recent increases by state-owned retailers. Still, economists don’t expect further increases with crude oil trading closer to the mid-$80s a barrel, from above $100 earlier this year. That’s one reason why many have pushed back or abandoned their calls for further tightening, arguing policymakers have room to wait.

Among the outliers is Upasna Bhardwaj at Kotak Mahindra Bank who forecasts half a percentage point of rate hikes in the second half of the fiscal year, possibly beginning in December.

“We remain cautious on the impact of the recent re-escalation of geopolitical tensions and the plausible upside risks on oil prices,” said Bhardwaj. For now, she expects the RBI to “remain on a wait and watch mode” as it assesses the impact of pass through of supply-side pressures into core inflation.

An intensifying El Niño has raised concerns that below-normal rainfall could hurt crop production and lift food prices later this year. Seasonal monsoon rainfall is running 18 per cent below the long-term average. As of July 3, farmers had planted only about one-third of the normal area for kharif, or summer-sown, crops — down 20.8 per cent from a year earlier, Aastha Gudwani, India chief economist at Barclays Plc.

Gudwani expects inflation to accelerate toward the upper end of the RBI’s tolerance band in the December quarter because of unfavorable base effects and weaker rains. However, she still believes policymakers will remain on hold. 

“Hopefully, as rains pick up, sowing decline should taper too,” Gudwani said. “That said, should slower sowing yield lower output, we expect the government to dip into its buffer stocks.”

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