EcoFlash - CPI at 4.4% in June`26, rate hike likely in H2FY27 by PL Capital
Summary:
* CPI increased by 45 bps to 4.4% in June'26, driven by higher prices of food, fuel, precious metals, and unfavourable base effect.
* Core CPI (excluding food and fuel) also increased to 4.1% from 3.7% in the previous months.
* On yearly basis, housing inflation stood at 2.1% in June 2026, with rural and urban housing inflation at 2.7% and 2%, respectively.
* The top four items recording the highest inflation were: (1) Silver (133% YoY), (2) Ginger (50% YoY), (3) Gold and precious metal jewellery (37% YoY), and (4) Tomato (32% YoY).
* Additionally, rural and urban headline inflation increased to 4.7% and 4.0%, respectively, from 4.2% and 3.5% in the previous month.
* We expect inflation to surpass 5% in FY27, compared with 2.1% in FY26, mainly due to a lower base, higher food and fuel prices driven by El Niño and the West Asia crisis.
Other Highlights:
* Although education services and restaurant & accommodation services carry relatively modest weights in the CPI basket, inflation in these categories increased notably.
* Education services inflation rose to 3.3% YoY from 3.0% YoY, while restaurant & accommodation services inflation increased to 7.0% YoY from 5.7% YoY in the previous month.
* Personal care and miscellaneous services have continued to report double-digit price inflation for some time, with inflation currently standing at 17% in June'26.
* We expect fuel prices to remain sensitive to geopolitical developments over the medium term. Consequently, input and logistics costs are likely to witness further increases.
Outlook on policy rates:
* Given war-related risks and expectations of a below-normal monsoon, which could adversely affect agricultural yields and perishable goods, we anticipate rate hikes post Q2FY27 than immediate change in August policy.
* RBI is prudent about maintaining data-dependent approach in its upcoming policy announcements, given the multiple challenges facing the economy, including rupee depreciation, inflationary pressures (domestic, imported) and risks to economic growth.
Exhibit 1: CPI to breach 6% band in Q3FY27
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