Indian Economy: Price tentacles amid growth moderation

Crisil expects India’s gross domestic product (GDP) to grow 6.6% this fiscal, with the average Consumer Price Index (CPI)-based inflation at 5.1% as the West Asia conflict extends to the third month with no lasting solution in sight.

The revised outlook is based primarily on an upward revision in our average crude oil price forecast and its spillover effects for this fiscal—to $90-95 from $82-87 per barrel—and lingering geopolitical uncertainties.

Inflationary pressures are gradually increasing, with a noticeable impact on the Wholesale Price Index (WPI) than the retail gauge.

Inflation based on WPI rose to 8.3% in April, while that based on CPI remained benign at 3.5%. Over the past four months, core CPI inflation has remained stable at 3.7%.

The current spike in WPI is directly linked to the West Asia conflict compared with the CPI, adversely impacting commodities and production processes.

We expect CPI inflation to rise and average 5.1% this fiscal for three reasons:

• Rising input costs, as indicated by the spike in WPI, will gradually pass through as producers want to protect their margins, leading to higher core inflation
• Increases in crude oil prices are being gradually reflected in the pump prices of petrol and diesel, which together carry a 4.8% weight in CPI
• Below-normal rainfall expected amid weather disruptions could negatively impact agricultural production and put an upward pressure on food inflation

Over the past two years, capital inflows have been insufficient to finance even a small current account deficit (CAD). At the same time, capital outflows have intensified, while the West Asia conflict has added to India’s vulnerability.

CAD is projected to rise to 2.2% of GDP this fiscal from an estimated 0.8% in fiscal 2026. A wider CAD and weakening capital inflows have weighed on the rupee, which has depreciated 6.7% since the beginning of calendar year 2026.

It remains to be seen if the Reserve Bank of India (RBI) will raise rates to support the domestic currency on the lines of Bank Indonesia.

We expect the RBI to adopt a wait-and-watch approach for now and observe whether the supply-side pressures on inflation are transitory or durable.

The Monetary Policy Committee is likely to maintain the repo rate and stance in the upcoming meeting. Risks to inflation are tilted to the upside and likely to increase with the duration and intensity of the West Asia conflict. Currently, retail and core inflation remain well within the comfort zone.