India inflation rises to 3.93% in May as food and fuel risks return

India’s retail inflation accelerated in May but stayed just below the Reserve Bank of India’s medium-term target, giving policymakers little room to sound relaxed as food, fuel and weather risks build.

Consumer prices rose 3.93% from a year earlier, government data showed on Friday, up from 3.48% in April.

The reading was slightly below the 4% expected, but it still marked a move closer to the centre of the RBI’s inflation goal after several months of relatively benign price readings.

The number comes at a delicate moment for India’s economy.

Growth has remained resilient, but imported inflation risks have increased as crude prices, shipping costs and the rupee’s external position come under pressure from the Middle East conflict.

Food and fuel risks return

The latest inflation print suggests price pressures are no longer easing as comfortably as they were earlier in the year.

Food remains the main swing factor for Indian households, while fuel and transport costs are becoming more important after recent increases in energy prices.

The finance ministry had already warned that inflation could pick up because of higher fuel prices and the risk of weaker-than-normal monsoon rains.

That matters because rainfall patterns directly affect crop output, vegetable supplies and rural demand.

India is also exposed to global crude markets as one of the world’s largest oil importers.

Any prolonged disruption around the Strait of Hormuz would raise the import bill, widen external pressures and lift costs for companies that rely on fuel, freight and imported inputs.

For consumers, the risk is that higher costs gradually show up in packaged goods, transport fares and daily essentials.

Several companies have already been dealing with margin pressure from pricier logistics and raw materials.

RBI gets a mixed signal

For the RBI, the May data is not alarming, but it is not comfortable either.

Inflation remains within the 2%-6% tolerance band and just below the 4% target, yet the direction of travel has turned higher.

The central bank held the repo rate at 5.25% at its June policy meeting and kept a neutral stance, signalling caution rather than panic.

The latest data supports that approach. It gives the RBI reason to wait, but not enough evidence to dismiss the risk of a stronger inflation pass-through later in the year.

Markets will now focus on three variables: the monsoon, oil prices and the rupee. A good monsoon and softer crude could keep inflation near target.

A weaker rainfall season or another energy shock would make the RBI’s job harder, especially if companies pass higher costs on to consumers.