Fuel Price Hikes May Push Inflation to 5%, Reserve Bank to Adopt Wait-and-Watch Approach.

Fuel Price Hikes and Import Duties May Push Retail Inflation to 5% by June

Economists have warned that fuel price hikes and higher import duties on gold and silver could push retail inflation to 5% by June. The Reserve Bank of India (RBI) is expected to wait and watch till the impact of fuel price hikes settles in before tightening interest rates in the second half of the fiscal year.

Over the past 11 days, starting May 15, petrol prices have been increased by Rs 7.38/litre and diesel prices by Rs 7.48/litre, with some inter-city variation. These price hikes will directly affect prices in sectors where petrol and diesel are used as inputs, such as transport and storage, and to some extent electricity.

In addition to fuel price hikes, the government on May 13 had hiked import duty on gold and silver to 15% to curb non-essential imports. Economists expect this to further push up retail inflation.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

CPI Inflation Projections

According to EY India Chief Policy Advisor D K Srivastava, the CPI inflation data for May is scheduled to be released on June 12. He expects CPI inflation to go up by about 75 basis points due to the fuel price hikes, with an overall increase averaging about Rs 7.5/litre in petroleum products.

The RBI mainly takes into account CPI inflation while deciding on monetary policy rates. Economists expect the RBI's monetary policy committee (MPC) to persist with its "neutral pause" in the June 5 meeting, keeping all policy rates unchanged.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

However, India Ratings & Research Director Megha Arora expects June CPI to surpass 4% but remain within the RBI's upper tolerance band of 6%. Crisil Principal Economist Dipti Deshpande expects average inflation at 5.1% in the current fiscal year.

RBI's Monetary Policy

The RBI has the mandate to keep inflation at 4% with a tolerance band of 2% on either side. Economists expect the RBI to revise its FY27 inflation forecast from 4.6% to 5% and cut its growth forecast to 6.7% (from 6.9%) after the June 5 MPC meeting.

In the April 2026 Monetary policy report, the RBI's base case assumed crude oil at USD 85/bbl for its growth and inflation forecasts. With reality decisively shifting to the USD 95/bbl scenario, economists expect the RBI to revise its forecasts accordingly.

Impact of Fuel Price Hikes

The fuel price hike will have a minor impact on the May CPI inflation figure, but transmit more widely into the number for June, according to ICRA Chief Economist Aditi Nayar. She expects the FY27 baseline CPI inflation at 5%, presuming crude oil averages USD 95/barrel.

Economists are incrementally getting worried that as the uncertain backdrop lingers, spillover effects to transportation fare, other raw material costs, and finally output prices may make inflation outcome in 2HFY27 (October-March) difficult to digest, necessitating a rate hike.