India says retail inflation may accelerate on fuel price rise

NEW DELHI: India's retail inflation could rise as a result of recent fuel ‌price hikes and weaker-than-normal monsoon rains, the country’s ​finance ⁠ministry said in a report on ‌Saturday, as energy ‌supply disruptions continue because of the Middle East conflict.

The duration of the ‌Strait of Hormuz disruption remains the "single most consequential variable" ⁠for India's external and price outlook, the report said.

A sharp rise in upstream price pressures, along with recent increases in fuel prices, suggests a gradual pass-through to retail ​inflation through higher transport, energy and food-related ‌costs in the coming months

A significant rainfall deficit coupled with current geopolitical conditions ⁠could translate into food inflation, weakening rural demand and aggregate growth, the report said. The near-term outlook ​for ‌the Indian economy is one of cautious ‌resilience.

The confluence of elevated global energy prices, a depreciating rupee, rising upstream cost pressures and ‌the prospect of ‌a below-normal monsoon ⁠calls for sustained policy vigilance, the report ‌said.

India's annual retail inflation rose marginally to 3.48 per cent in April and so ⁠far remains below the central ​bank’s target. The finance ministry releases its economic report every month.

Meanwhile India forecast an El Nino-weakened monsoon in 2026 that will bring the lowest rainfall in 11 years, fuelling concerns ​over crops, food prices and ⁠growth in the world's fifth-largest economy, battling inflationary pressures from the Iran war.

The monsoon delivers about ‌70% of annual rains to replenish crucial ‌water sources in a nearly $4-trillion economy where almost half of farmland lacks irrigation and about half the population earns its livelihood from farming.

Prospects of weak rainfall and distribution add to inflation risks and weigh on growth, said Gaura Sengupta, chief economist at IDFC First Bank.

"A deficient monsoon, particularly ‌in the crucial July-August months, can add to the pressure and push up inflation closer to an average of 5.5% if food inflation spikes," ⁠Sengupta said.

That compares with India's retail inflation of 3.48% in April, driven by higher food prices, though the outlook is clouded by energy costs linked to the Middle East conflict.

This year's monsoon is seen at 90% of a long-period average, below an April forecast of 92% and the weakest since 2015, M. Ravichandran, secretary in the earth sciences ministry, told a press conference earlier on Friday.

The India Meteorological Department defines average, or normal, rainfall as ranging from 96% to 104% of a 50-year average of 87 cm (35 inches) for ​the four-month monsoon season.

An El Nino is likely to develop soon and influence rainfall, Ravichandran added, with its intensity ‌expected to range between moderate and strong in the latter half of the monsoon season.

India is forecast to receive below-average rainfall in June, less than 92% of the long-period average, Ravichandran said.

Several Indian states are reeling under heatwave conditions, with temperatures soaring above 45 degrees Celsius (113°F) - levels ⁠that usually ease with the arrival of monsoon rains.

But the monsoon's advance has slowed, with rains now expected to reach India's southern coast within a week, later than the earlier forecast of May 26. The monsoon typically reaches India around June 1 before spreading nationwide by mid-July.

Maximum and minimum ​temperatures in June ‌are likely to stay above average, with many states across southern, western, central and northern India expected to see more heatwave days, the ‌weather department said.

SUFFICIENT STOCKS

India has received below-average rainfall in most El Nino years, sometimes triggering severe droughts that damaged crops and led to curbs on grain exports.

Despite sufficient stockpiles of staples such as rice and wheat, a patchy monsoon could mean lower incomes in the countryside, home ‌to about two-thirds of ‌a population of 1.4 billion.

Lower rural incomes in turn typically dampen ⁠sales of consumer goods, from motorcycles to refrigerators.

"Below-normal rainfall could affect early-season planting of pulses, cotton, edible oilseeds and ‌coarse grains such as corn," said Ashwini Bansod, vice president for commodities research at Phillip Capital India, a Mumbai-based brokerage.

Rice paddy is also at risk in non-irrigated areas in parts of the northern and northwestern states, Bansod ⁠said.

The world's largest exporter of rice and onions and the second-largest producer of sugar, India is also the world's largest importer ​of edible oils, filling nearly two-thirds of its demand.

An El Nino occurs when ocean temperatures rise above normal in the central and eastern Pacific, typically bringing hot and dry weather to Southeast Asia and other regions.

Reuters