RBI warns food, fuel costs could reignite broader inflation

The Reserve Bank of India (RBI) Bulletin for August has flagged the risk of broader inflationary pressures, warning that higher food, fuel and other input costs could push up prices across the economy.

"Although generalised inflation pressures continue to remain modest so far, the risks of secondround impact of higher food, fuel and other input prices translating to broad-based inflation persist," RBI Governor Sanjay Malhotra said in the August Bulletin on the decisions of the Monetary Policy Committee (MPC).

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MPC members have remained cautious about any broad-based rise in inflation, as a sustained increase could create pressure for tighter monetary policy, according to the minutes of the Reserve Bank of India’s latest monetary policy meeting released last week.

Headline inflation, measured by the Consumer Price Index, remained above the RBI’s 4% target, rising to 4.5% in July from 4.4% in June, mainly due to supply-side pressures. Meanwhile, stable core inflation indicated limited pass-through of higher input costs.

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High-frequency indicators for July pointed to continued strength in economic activity and domestic demand, supported by rural consumption, the RBI’s State of the Economy report said. Manufacturing and services activity maintained the momentum seen in the first quarter, while merchandise exports and imports recorded double-digit growth.

An article in the August bulletin also said the recovery in southwest monsoon in July helped kharif crop sowing reach closer to normal acreage, partly mitigating some of the risks to the agriculture sector.

However, the global economic outlook continues to be shaped by geopolitical frictions in West Asia and fresh tariffs by the US, said the article on 'State of the Economy'.

"The momentum of Q1 2026-27 continued in July with most of the high-frequency indicators reflecting sustained manufacturing and services activity, and double-digit expansion in merchandise exports and imports," it said.

The article further said while headline consumer price index (CPI) inflation edged up above the target, it was primarily on account of supply-side pressures. Stable core inflation reaffirmed the lower pass-through of cost pressures.

"Liquidity conditions eased, supporting credit growth and ongoing investment activity. Foreign capital inflows rebounded, reinforcing the external sector," it added.

Financial conditions are characterised by high credit growth, comfortable liquidity, and softening G-sec (government securities) yields supported by a rebound in capital inflows.

The central bank, however, said the views expressed in the Bulletin article are those of the authors and do not represent the views of the Reserve Bank of India.