The wholesale inflation rate in India dipped to a 14-month low of 0.39 per cent in May while retail inflation softened to 2.82 per cent—a 75-month low—presenting encouraging signs for price stability. Much of this relief has come on account of falling food and fuel prices, particularly the sharp decline in vegetable inflation and subdued prices for items like onions, potatoes, and pulses.
The inflation data for May is indeed indicative of a meaningful, broad-based easing of price pressures across primary articles, manufactured products, and fuel. Nevertheless, India’s relieving tone has to be tempered by a note of caution. The global economic landscape has changed drastically in just a few days, thanks to the eruption of hostilities between Israel and Iran. The geopolitical flashpoint, situated perilously close to the Strait of Hormuz—a vital artery for global oil shipments—has already started influencing global crude prices. Oil has surged by nearly 11 per cent since the outbreak of the conflict, raising the spectre of imported inflation for energy-hungry nations including India, which imports nearly 85 per cent of its crude oil needs. For now, Indian equity markets seem unfazed. The Sensex has barely budged despite the geopolitical tremors. Economists have attributed this to a combination of macroeconomic resilience, a robust inflation trajectory, and the lack of immediate supply-side disruption from Iran, which supplies only around 4 per cent of global oil—primarily to China. Additionally, buffer mechanisms, such as domestic oil reserves and OPEC’s excess capacity, have offered some cushion against volatility. But the calm may be deceptive!
Oil is rooted deeply in India’s socio-economic structure. It comprises over 9 per cent of the Wholesale Price Index (WPI) basket. It also influences the trajectory of transport, fertiliser, and manufacturing costs. It is argued that a 10 per cent spike in oil prices could translate to nearly 1 per cent increase in WPI inflation. This, by all logic, would have downstream effects on the Consumer Price Index (CPI), the government’s subsidy bill, as well as the current account deficit. Even if there is no direct disruption to Iranian oil supplies, continued tension or psychological market reactions could potentially nudge inflation upwards and complicate India’s monetary policy planning. Adding to the complexity is the monsoon’s uneven progress. The India Meteorological Department has predicted a pickup in rainfall, but spatial distribution may still be a cause for concern. Experiences in the past have demonstrated that even an overall “normal” monsoon can leave several agrarian belts parched—leading to localised shortages and subsequent price spikes in food items.
Perhaps keeping view of these latent risks, the Reserve Bank of India wisely shifted its stance to “neutral” in its policy review. At the same time, it also reduced its FY26 inflation projection to 4 per cent; the quarter-wise estimates range from 3.6 per cent to 4.4 per cent. Yet, with global oil prices swinging and domestic weather patterns unpredictable, even this cautiously optimistic projection could prove vulnerable. It is also very pertinent to note that the inflation narrative is playing out against a broader backdrop of global uncertainty. In the UK, for instance, inflation cooled to 3.4 per cent in May, but the Bank of England has been cautious due to escalating Middle East tensions and rising energy prices. Financial markets across the world are beginning to reprice expectations on interest rates, which would factor in a prolonged period of geopolitical risks. For India, the key will be to ensure proactive policy recalibration. The RBI will have to stay agile, alert and cautious. Fiscal policymakers, in the meantime, must ensure that fuel subsidies and strategic oil reserves are deployed judiciously in the case of crude spiking dramatically. Trade and shipping officials already seem to be in talks to mitigate cost escalations, which is timely. To sum up, India’s inflation numbers offer a moment of respite. However, the road ahead is fraught with external vulnerabilities. The current low inflation is an opportunity—but unless protected wisely, it could slip away as quickly as it came.