Inflation may remain near 6% till June 2027; two RBI rate hikes on the cards: Sectors in focus

Retail inflation could remain elevated at or around 6 per cent until June 2027, driven by rising food prices and emerging risks to the Rabi crop, according to global brokerage JP Morgan. The brokerage has raised its inflation projections, flagging concerns over both food prices and a broadening of underlying inflationary pressures.

Following the October Consumer Price Index (CPI) inflation print of 6.1 per cent, November CPI is tracking at 6.4 per cent, JP Morgan said. It now expects headline CPI inflation to average 6.3 per cent in the October-December quarter, above the Reserve Bank of India's (RBI's) forecast of 6 per cent.

More importantly, the brokerage expects inflation to remain close to 6 per cent till June 2027, in contrast to the RBI's forecast, which sees headline CPI gradually softening towards 5.6 per cent by the middle of 2027.

JP Morgan flagged two developments that it described as worrying signs in the inflation data.

First, food inflation increased to 8.5 per cent in October from 7.4 per cent in September. More persistent components of the food basket, particularly cereals and pulses, recorded sharp price increases during the month. Daily price data for November also indicate that the trend has continued.

Second, underlying inflationary pressures are firming up and becoming broader. Core-core inflation, which excludes petrol, diesel and precious metals from core inflation, increased another 0.45 per cent month-on-month (MoM), seasonally adjusted, in October. Consequently, its quarterly annualised momentum (3m/3m, saar) accelerated to 4.8 per cent in October from 3.1 per cent in May.

On a year-on-year (YoY) basis, core-core inflation firmed to 3.8 per cent in October. Diffusion and trimmed-mean indices also pointed to a broadening of underlying price pressures.

The share of items recording inflation above 4 per cent increased to 53 per cent in October from 46 per cent in September. Meanwhile, the 5 per cent and 10 per cent trimmed-mean inflation measures jumped to 5.3 per cent and 5 per cent, respectively, in October from 4.5 per cent and 4.2 per cent in September.

RBI faces policy challenge; Kotak expects 50 bps rate hike

Kotak Institutional Equities said the RBI faces a significant monetary policy challenge, while also highlighting that inflation may stay around 6 per cent over the next three quarters.

The domestic brokerage has revised its headline CPI inflation forecasts for FY27 and FY28 to 5.3 per cent and 5 per cent, respectively.

Kotak expects the RBI to raise interest rates by a cumulative 50 basis points (bps) during the remainder of FY27, with a 25 bps hike each in December and February.

"We continue to pencil in a 25 bps rate hike each in December and February, with risks of further hikes dependent on the persistence of the food price shock. For now, 2HFY28 inflation is likely to average around 4.5 per cent, keeping real rates at 150 bps in our base case of a terminal repo rate at 6 per cent; warranting a wait-and-watch mode post February," Kotak stated.

Which sectors could be impacted by higher inflation?

A sustained increase in retail inflation could have implications for several sectors, particularly those sensitive to input costs, consumer spending and interest rates.

FMCG and packaged food companies could face pressure from higher raw material and input costs, while automobiles and consumer durables could be affected by changes in household spending and financing costs.

Banks and non-banking financial companies (NBFCs) remain among the sectors to watch, given the implications of higher interest rates for borrowing costs and credit demand. Paint and tyre manufacturers could also face pressure from elevated input costs.