Fuel Price Revision Triggers Reassessment of FY27 CPI Trajectory: Economists

India’s ₹3 per litre increase in petrol and diesel prices is expected to push 2026-27 retail inflation above the RBI’s 4.6% projection, with economists estimating a direct addition of around 12 basis points to headline CPI and warning of wider spillovers through transport, logistics, manufacturing inputs, and food supply chains.

With oil marketing companies still facing under-recoveries and global crude prices remaining volatile, analysts expect further fuel price increases in the coming months, raising the risk of 2026-27 CPI inflation moving closer to 4.9%.

The Monetary Policy Committee had earlier mapped a gradual inflation trajectory for 2026-27, ranging from 4.0% in April-June to a peak of 5.2% in October-December before easing. The latest fuel move, however, introduces an early upside bias to this path, particularly if global crude prices remain elevated and additional retail adjustments follow.

Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank Economics, estimates May CPI inflation at around 3.9% after incorporating the fuel hike. She flags that the current revision may not be the last, with a cumulative increase of up to 10% in petrol and diesel prices possible over the coming months. This, she notes, would lift 2026-27 average CPI inflation to about 4.9%, including second-round effects.

A key transmission channel is the lagged pass-through from wholesale to retail inflation. April WPI inflation rose to a multi-year high, driven by fuel and broader input costs, including metals and chemicals. Non-food manufacturing inflation at 5% signals rising core cost pressures, which typically feed into CPI with a two- to three-month lag. This suggests that inflation pressure may broaden beyond energy into core goods through 2026-27.

At the same time, services inflation may see limited immediate impact as part of the fuel cost is absorbed by oil marketing companies and not fully transmitted to end prices. This partial absorption moderates the near-term CPI shock but does not remove the underlying cost pressure.

Food inflation remains an additional risk factor. Expectations of weaker monsoon conditions linked to El Niño, combined with higher diesel-linked farm input costs, could add volatility to vegetable and perishables prices. Even with strong food stocks and reservoir levels, economists note that rainfall distribution will be critical for price outcomes.

Sehul Bhatt, Director at CRISIL Intelligence describes the fuel adjustment as a partial correction in a prolonged under-recovery cycle for oil marketing companies, indicating that further price normalisation may be required to stabilise balance sheets. Meanwhile, Megha Arora, Director at India Ratings and Research estimates the combined inflation impact of fuel and related price changes, including transport-linked effects, at about 42 basis points.

Overall, the fuel price revision is shifting the 2026-27 inflation outlook slightly above the RBI’s central estimate, with energy costs re-emerging as a key driver of both headline and core inflation dynamics.