Petrol, diesel and LPG costs drive inflation higher; SBI Research flags rising imported price pressures

India's retail inflation remained below the Reserve Bank of India's 4% target in May, but rising fuel prices and growing external pressures are beginning to feed into domestic prices, prompting SBI Research to caution against expecting another rate cut in August.

According to the latest Ecowrap report by SBI Research, headline consumer price inflation (CPI) rose to 3.93% in May 2026 from 3.48% in April, driven largely by higher petrol and diesel prices, LPG shortages and increasing imported inflation.

One of the biggest concerns flagged by SBI Research is the sharp rise in imported inflation. Imported inflation climbed to 7.23% in May from 6.34% in April, while its weighted contribution to headline inflation increased by nearly 100 basis points to 2.43%, highlighting the growing influence of exchange-rate movements and global supply-chain disruptions on domestic prices.

"The impact of exchange rate fluctuations and external shocks like supply chain disruptions are now creeping into India's CPI," the report noted.

MUST READ: RBI MPC outcome explained: Why the Central Bank paused rates but turned cautious on growth and inflation

The effect of higher fuel prices was particularly visible in transport-related expenses. Transport inflation surged by 176 basis points to 1.8% in May from near-zero levels in April, reflecting the pass-through of increased petrol and diesel prices.

Cooking gas shortage

Cooking gas shortages also contributed to higher inflation in services. Inflation in restaurants and accommodation services jumped to 5.7% in May from 4.2% in April, marking a rise of 154 basis points. According to SBI Research, the increase was largely linked to a slight shortage of LPG supplies, which pushed up the cost of cooked food items and hospitality services.

Apart from fuel-related pressures, precious metals also played a significant role in inflation. Silver jewellery emerged as the largest contributor to headline inflation, adding 56 basis points, followed by gold with a contribution of 30 basis points. Petrol accounted for another 14 basis points.

Other items contributing to higher inflation included refined oil, mustard oil, fish, prawns, milk, chicken and goat meat.

MUST READ: Govt bars bulk purchases of petrol, diesel at pumps; here’s why

Rural inflation

SBI Research also highlighted that inflationary pressures were more acute in rural India. Rural inflation accelerated to 4.25% in May from 3.73% in April, compared with an increase to 3.53% from 3.16% in urban areas. Transport and restaurant services were among the key drivers in both regions.

Adding to concerns, India received 27% below-normal rainfall during the first 11 days of June, with rainfall deficits of 48% in the central region and 38% in eastern and northern India. Continued weakness in monsoon progress could delay the sowing of crops such as rice, cotton, soybeans and pulses, potentially creating fresh food inflation pressures.

Given the uncertainties surrounding energy prices, geopolitical developments, exchange rates, monsoon distribution and supply-chain conditions, SBI Research expects inflation to peak around October and does not currently see room for an RBI rate cut in August.

MUST READ: Government caps diesel sales at 200 litres per customer to curb black marketing; restrictions to stay for 90 days