The report warned that “WPI inflation crossing the 10% mark is not a tail risk; it is a plausible and near-term base case.”
It noted that retail CPI inflation is poised to catch up to the surge in wholesale momentum. The April 2026 inflation data leaves little room for optimism as “wholesale price index (WPI) inflation surges to a 42-month high of 8.3 per cent, with the fuel and power segment skyrocketing to 24.71 per cent.”
The report mentioned that this surge comes before retail fuel price hikes are fully transmitted through the system, before El Nino affects food supplies, and before fertiliser shortages ripple across agricultural input costs.
With global crude prices potentially remaining anchored above USD 100 per barrel, several more rounds of hikes are necessary to recover past losses.
“By our estimates, this initial adjustment covers only 7-8% of the cumulative under-recoveries from three months of selling fuel at unchanged prices, a burden estimated at Rs 1.7-1.8 trillion,” the report said.
A widening divergence exists between official projections and ground realities. The finance ministry’s revised assessment of 5.5 to 6 per cent CPI inflation for FY27 openly exceeds the Reserve Bank of India’s own forecast of 4.6 per cent. “The mix of slowing growth, widening BoP stress, and sticky inflation will complicate the RBI’s job, likely forcing a sharper rupee breach beyond 100 and a reversal of last year’s monetary accommodation, triggering higher rates and a painful policy unwind,” the report outlined the complicating factors for monetary policy.
The report projected that official CPI forecasts will soon align with a more realistic 6 to 7 per cent range for the second half of FY27. Consequently, demand destruction from sustained high inflation threatens to compress GDP growth well below the central bank’s projected 6.9 per cent.
“Dwindling capital flows and a widening trade deficit have raised the real risk of a third successive Balance of Payments deficit,” the report noted.
The “stagflationary” dynamic transmits unevenly across different sectors of the economy. Agriculture faces mounting risks from higher fertiliser prices, Gulf supply disruptions for urea, and the threat of a deficient monsoon. With rural inflation rising faster than urban inflation, rural demand remains increasingly vulnerable.
Meanwhile, industry and manufacturing absorb the brunt of the supply shock as rising energy, logistics, and input costs compress margins across chemicals, packaging, textiles, consumer goods, aviation, and transport.
As per the report, for banking and financials, credit growth is partly driven by distress-linked working capital demand from firms facing weakening cash flows, rather than robust underlying activity.