India WPI Inflation May Cross 10% Soon as Fuel Price Hikes Signal Broader Cost Pressures: Systematix

India’s wholesale inflation could breach the 10% mark in the near term, driven by rising fuel costs and broader supply-side pressures, according to a report by brokerage Systematix, which warned that the latest increase in petrol and diesel prices is likely the beginning of a longer cycle of hikes.

The Rs 3 per litre increase in retail fuel prices, announced days after the Prime Minister called for austerity, had been largely anticipated by markets, the report said, adding that it “is almost certainly the beginning of a series of hikes, not the end of one.”

Wholesale price index (WPI)-based inflation accelerated to 8.3% in April, its highest level in 42 months, led by a sharp rise in fuel and power prices, which climbed 24.71%. The report cautioned that this surge has occurred even before the full impact of retail fuel price adjustments is transmitted across the economy.

It also flagged additional upside risks to inflation, including the potential impact of an El Nino-driven disruption to food supplies and fertiliser shortages that could push up agricultural input costs in the coming months.

Retail inflation, as measured by the consumer price index (CPI), is expected to follow wholesale trends with a lag. “WPI inflation crossing the 10% mark is not a tail risk; it is a plausible and near-term base case,” the report said.

Global crude oil prices, if sustained above $100 per barrel, would necessitate further increases in domestic fuel prices to offset prior losses incurred by oil marketing companies. Systematix estimates that the latest hike covers only 7–8% of cumulative under-recoveries from three months of unchanged retail prices, pegged at around Rs 1.7–1.8 trillion.

The report also pointed to a growing divergence between official inflation forecasts and underlying price dynamics. The finance ministry’s revised CPI projection of 5.5–6% for FY27 already exceeds the Reserve Bank of India’s estimate of 4.6%, suggesting that official forecasts may need further upward revision.

Systematix expects CPI inflation to move towards a 6–7% range in the second half of FY27, raising concerns about demand compression and slower economic growth. Sustained inflationary pressures could weigh on consumption and push GDP growth below the central bank’s current projection of 6.9%.

Macroeconomic risks are also building on the external front. Weakening capital inflows and a widening trade deficit have increased the likelihood of a third consecutive balance of payments deficit, the report said.

The combination of slowing growth and persistent inflation could complicate monetary policy, potentially forcing the central bank to reverse its accommodative stance. The report warned that the rupee could weaken beyond the 100-per-dollar level under such conditions, alongside a tightening of interest rates.

Sectoral impacts are expected to vary. Agriculture faces rising risks from higher fertiliser prices, potential supply disruptions from Gulf countries, and an uncertain monsoon outlook. Rural inflation is already outpacing urban levels, posing risks to rural demand.

Industrial sectors, including chemicals, textiles, packaging, aviation and transport, are likely to bear the brunt of rising input and logistics costs, which could squeeze margins.

In the financial sector, the report noted that credit growth is increasingly being driven by working capital demand from companies facing cash flow pressures, rather than expansion-led borrowing, indicating underlying stress in the system.

(With inputs from ANI)