Crude, milk and gold push inflation higher; RBI likely to hold rates despite WPI jump
Rising crude prices, fuel pass-through and higher milk costs are widening the gap between wholesale and retail inflation.
Due to the range-bound increase in CPI inflation, the RBI might maintain key policy rates in its June Monetary Policy Committee meeting. (AI Image)
India Ratings and Research (Ind-Ra) projects a marginal rise in the headline consumer price index (CPI) inflation to 3.8% in May 2026 from 3.5% in April 2026 due to the transmission of high energy prices, while the headline Wholesale Price Index (WPI) inflation might rise to 9.0% from 8.3% due to the surge in global crude prices.
“In 2HFY27, we could see some convergence in WPI and CPI, due to a likely further passthrough of petrol and diesel prices and due to the second-round effect, particularly of diesel prices on freight. The implications of the divergence will be reflected variably, as CPI inflation guides monetary policy direction, while WPI inflation is expected to impact fiscal deficit. But both inflation numbers will impact spending – while CPI inflation impacts consumers, WPI inflation impacts producers, making the final product and the input/intermediary products expensive, respectively. Both inflation measures face upside risks from the West Asia conflict, leading to higher prices of crude and its derivatives, along with the potential of El Nino effect,” says Megha Arora, Director, Public Finance, Ind-Ra.
High Food, Gold and Silver Prices Drove CPI Inflation: In April 2026, the CPI inflation (retail inflation) rose to a 14-month high of 3.48% yoy (Ind-Ra forecast: 3.8%, March 2026: 3.4%; February 2026: 3.21%) due to high food, gold and silver prices. This increase was due to rising vegetable prices and a high demand for secure investments amid geopolitical tensions in West Asia. Fuel inflation remained muted due to the base effect. Fuel price passthrough remained variable – transport showed negative inflation, while costlier commercial liquified petroleum gas (LPG) led to higher restaurant services cost of 4.2% (March 2026: 2.88%; February 2026: 2.73%).
WPI Inflation Majorly Caused by Fuel and Power: WPI inflation accelerated to 8.3% in April 2026 (Ind-Ra forecast: 4.7%; March 2026: 3.88%; February 2026: 2.26%) due to a broad-based increase across segments, though fuel and power contributed substantially, due to the firming of global crude price as a consequence of the West Asia conflict. Low base also contributed to higher inflation (April 2025: 0.85%). Fuel & power have been recording an inflationary trend since March 2026 – the segment recorded an inflation of 24.71% in April 2026 (March 2026: 1.05%; February 2026: negative 3.85%). Inflation in petrol, diesel, and LPG witnessed at least a seven-fold rise underlining supply constraints.
The impact of high global crude price was evident in the primary articles category and manufactured products. The former was driven by crude petroleum and natural gas, oil seeds and minerals. Crude petroleum price in particular increased 88.06% in April 2026 (March 2026: 51.57%; February 2026: negative 1.29%). In the manufacturing group, while several sub-groups witnessed inflation, food products, basic metals, chemicals, and textiles exerted an upward pressure. High global metal prices, potential El Nino effect, and a higher cost of imported inputs are likely to keep inflation in this segment high in the coming months.
Divergent CPI and WPI Inflation: The divergence in CPI and WPI inflation has essentially been due to fuel prices. WPI assigns a larger weight to fuel (10.35%, crude petroleum: 1.95%, natural gas: 0.46% and mineral oil: 7.95%) than CPI. The impact of higher prices on two inflation measures varies due to differences in weights and the timing of price pass-through to consumers. Fuel and power inflation (WPI) grew 3.5% and 39.5% yoy, respectively, in March and April 2026. However, due to the minimal pass-through of higher global oil prices to consumers, the CPI for transport group grew 0% and negative 0.01% in March and April 2026, respectively. Barring LPG, premium petrol and diesel, aviation turbine fuel, and industrial diesel, retail prices of all other petroleum products remained same till 14 May 2026. Retail prices of mass consumption products – petrol and diesel – were revised by INR3/litre each from 15 May 2026. The retail price revision will not have any impact on wholesale prices; however, it will push CPI inflation by 15bp.
The retail selling price of milk was revised on 14 May 2026 by INR3/liter by the two largest organised sector milk brands – Amul and Mother Dairy. This revision will not have any impact on wholesale inflation; however, it will push retail inflation (CPI) 26bp. While the inflation impact of petroleum product prices may reduce once global prices fall, the inflation impact due to milk prices is structural and will continue to push inflation till May 2027.
India’s gold import grew 24.1% yoy in FY26 to USD72.0 billon; gold import was third highest after crude oil and electronic goods. On 13 May 2026, India increased import duty on gold to 15% from 6% earlier. This may push retail inflation by 5bp; however, global gold prices in May 2026 are 4%-5% lower than April 2026 prices, hence the import duty increase on gold may be neutral for inflation.
The implications of this divergence will be reflected variably, as CPI inflation guides monetary policy direction, while WPI inflation might impact fiscal deficit. Due to the rangebound increase in CPI inflation, the Reserve Bank of India might maintain key policy rates in its June Monetary Policy Committee meeting. On the other hand, the GDP deflator reacts more to WPI, implying a higher nominal GDP. This will lead to a higher tax revenue for the government, and hence, will a positive impact on the fiscal deficit.
