El Nino may push food prices higher, inflation seen at 5.2-5.5 per cent in FY27

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India could face renewed inflationary pressures in the coming months as the likelihood of an El Nino weather event increases, potentially impacting food production and supply chains, according to a research report by Bank of Baroda.

The report noted that while current food supply conditions remain comfortable, weather-related risks and higher fuel costs could put upward pressure on prices during FY27.

El Nino threat looms over food inflation outlook

According to the report, there is an 80 per cent probability of an El Nino event developing during the June-August period. The likelihood of El Nino conditions continuing through at least November is estimated at more than 90 per cent.

El Nino is generally associated with below-normal rainfall in parts of India and can adversely affect agricultural output, particularly food crops. Any disruption in production could lead to higher prices for essential commodities and add to inflationary pressures.

However, the report pointed out that current reservoir levels remain above normal storage levels as of June 11, while vegetable arrivals across markets have remained satisfactory so far.

Researchers noted that it remains too early to determine whether existing supply conditions will be sufficient to offset any adverse impact from weather disruptions or higher fuel costs.

Inflation projected at 5.2%-5.5% in FY27

Bank of Baroda economist Dipanwita Mazumdar projected that Consumer Price Index (CPI)-based inflation is likely to settle in the range of 5.2 per cent to 5.5 per cent during FY27.

The forecast assumes some impact from El Nino-related weather disturbances and average crude oil prices ranging between USD 90 and USD 100 per barrel.

The report highlighted that inflationary risks are becoming more pronounced due to a combination of rising energy costs and potential supply-side challenges.

Headline inflation rises in May

India's headline retail inflation rose to 3.9 per cent in May 2026, compared to 3.5 per cent in April.

The figure was slightly lower than Bank of Baroda Research's estimate of 4.1 per cent but reflected a noticeable increase from the previous month.

The rise was primarily driven by higher food and fuel prices, with food inflation accelerating to 4.8 per cent during the month.

Fuel prices contribute to rising costs

The report noted that transport inflation increased following recent hikes in petrol and diesel prices.

In addition, inflation in restaurant and accommodation services also moved higher, indicating broader cost pressures across the services sector.

Analysts said rising fuel prices not only directly impact transportation costs but also increase logistics and distribution expenses, which can eventually be passed on to consumers.

Core inflation shows signs of pressure

Core inflation, which excludes food and fuel prices, increased to 3.9 per cent in May, signalling the emergence of broader underlying price pressures in the economy.

According to the report, businesses may increasingly pass on higher input costs to consumers if demand conditions remain stable.

This could result in a more widespread rise in prices across various sectors beyond food and energy.

Food and freight costs likely to remain key risks

The report warned that food inflation could remain elevated in the coming months due to the combined impact of higher transportation costs and weather-related uncertainties.

Researchers noted that rising freight expenses resulting from higher fuel prices may increase the cost of moving agricultural produce across the country.

"For food inflation, the spillover of higher fuel costs and a likely increase in freight costs may feed into higher inflation in the near term," the report stated.

Policymakers likely to monitor inflation closely

The report emphasised that second-round effects of fuel price increases on food and core inflation will require close monitoring, particularly if weather conditions worsen.

While current reservoir levels and agricultural supplies provide some cushion, economists believe inflation risks could intensify if El Nino affects crop production during the monsoon season.

With both weather-related challenges and global energy prices remaining uncertain, policymakers are expected to closely track inflation trends in the months ahead as they assess the impact on consumers and economic growth.

(With inputs from PTI)