Six consecutive months of increases! India's April CPI rises to 3.48%, input-driven energy inflation risks are building.

Six consecutive months of increases! India's April CPI rises to 3.48%, input-driven energy inflation risks are building.

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Although India’s April inflation data was slightly better than market expectations, high oil prices and extreme weather are gradually eroding this “policy buffer,” making the Reserve Bank of India’s (RBI) June policy meeting face more complex trade-offs.

According to data released by India’s Ministry of Statistics and Programme Implementation on Tuesday, the Consumer Price Index (CPI) for April rose 3.48% year-on-year, higher than the previous 3.40%, marking the sixth consecutive month of increase, but lower than the market expectation of 3.78%. After the data release, yields on India’s 10-year government bonds rose slightly by 2 basis points to 7.05%, indicating that the market remains cautious about the inflation outlook.

This slightly better-than-expected inflation data does provide a temporary policy buffer for the central bank, but structural upward pressures have not subsided. Food prices account for about 37% of India’s CPI basket and rose 4.2% year-on-year in April, already showing signs of heating up. Abhishek Gupta, Senior India Economist at Bloomberg, noted that oil prices are expected to rise gradually, and the El Niño phenomenon may impact agricultural output, putting clear upward risks on inflation.

Energy variables combined with climate risks, upward inflationary pressure accumulates

Energy is undoubtedly the biggest variable at present. India relies on imports for nearly 90% of its crude oil, and the ongoing situation in Iran continues to disrupt global fuel supply, keeping international oil prices above $100 per barrel, posing significant imported inflationary pressure on India. Although India has not seen the sharp fuel price increases experienced in some other countries, the authorities have implemented rationing in key industries and related costs are on the rise.

Last Sunday, Prime Minister Modi even publicly called on the public to reduce fuel consumption to cut import expenditure. HDFC Bank economist Sakshi Gupta pointed out that if oil prices remain above $100 per barrel, price hikes at the pump will raise overall inflation in the coming months, both directly and indirectly.

It’s worth noting that climate risks are compounding the energy shocks. Persistent heatwaves and the forecast for below-normal monsoon rains are adding challenges to food supply chains. If the monsoon underperforms, reduced agricultural output will directly transmit to grain prices, further narrowing the central bank’s already limited policy space.

Madhavi Arora, economist at Emkay Global Financial Services, commented that while April's better-than-expected inflation data did provide a positive start to the year, the looming fuel price hikes and possible food price increases due to unfavorable monsoon clearly point to upward inflation risks.

The Reserve Bank of India left interest rates unchanged last month, with the next monetary policy meeting scheduled for June 5. Analysts generally believe that under the dual pressure of energy and climate, India’s inflation is likely to show a fluctuating upward trend in the coming months, making the RBI’s balance between growth stabilization and inflation control more delicate.

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