- India may see inflation around 6% over the next three quarters according to SBI MF
- Weather risks include below-normal monsoon and a strong El Niño affecting food prices
- Delayed price hikes by companies could push inflation higher despite stable commodity costs
India could face a prolonged period of inflation, with consumer price growth potentially hovering around 6% over the next three quarters. SBI Mutual Fund has identified weather-related food price pressures, delayed price increases by consumer companies and the possibility of higher fuel prices as three major risks.
In its SBI MF Market Outlook report, the fund house estimates that headline CPI inflation could average around 5.8% over the next three quarters. It also warns of a material risk that inflation could breach the 6% threshold during this period.
The first concern is the weather outlook. India's monsoon ended 12.6% below normal, while a strong El Niño is expected between January and March 2027. Such conditions could affect agricultural output, tighten food supplies and push up prices. This makes food inflation a key risk for household budgets and the broader economy.
The second factor is delayed price increases by consumer-facing companies. Businesses have faced higher input costs but may not have fully passed them on to customers. SBI MF expects more companies to raise prices over the coming months. Such increases could add to underlying inflation even if commodity prices stabilise.
The third risk comes from crude oil. Petrol and diesel prices could rise if international oil prices remain elevated over the next five to six months. Higher fuel costs would feed into transportation, logistics and manufacturing expenses, creating broader inflationary pressure.
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SBI MF sees at least 75 bps of RBI rate hikes
The inflation outlook could have significant implications for monetary policy. SBI MF expects the Reserve Bank of India to raise the repo rate by at least 75 basis points, taking it to 6.25%. It believes the RBI may then shift to a data-dependent approach.
The fund house argues that a real interest rate of around 1% could require the policy rate to reach at least 6.25%. Its assessment also reflects the RBI's FY27 CPI inflation projection of 5.2%, which remains substantially above the central bank's 4% target.
Meanwhile, Indian bond yields have faced volatility following the RBI's October policy review. Liquidity-tightening measures pushed overnight rates above the repo rate, while short-term certificate of deposit yields moved sharply higher.
SBI MF cautions that currency pressures, geopolitical uncertainty and food inflation could complicate the RBI's policy decisions. It also warns that the terminal interest rate could exceed 6.25% if these risks intensify.
For markets, the trajectory of crude prices, food inflation and the RBI's liquidity management will remain crucial in determining the direction of interest rates.
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