India's Spreading Inflation Worries Central Bank
By wchung | 25 May, 2026

India’s headline inflation accelerated faster than expected to 10.2 percent in May over last year, as inflation spreads from food and fuel to core manufacturing prices, government data showed Monday.

High food and fuel prices have plagued India for months, but Monday’s data showed that manufacturing prices are also rising fast, thanks to a robust industrial rebound and strong domestic demand, adding to pressure on the central bank to hike rates sooner rather than later.

Food inflation remained a stubbornly high 16.5 percent in May, the Ministry of Commerce said. Fuel and power inflation came in at 13.1 percent and manufacturing inflation — a key measure for central bank policymakers — was 6.4 percent, slightly off April’s 6.7 percent.

The ministry also raised its inflation estimate for March to 11.0 percent from 9.9 percent. April inflation was 9.6 percent and has not yet been revised.

Inflation is quickly becoming a political issue in India, where opposition groups have staged protests over runaway food prices.

The ruling Congress Party coalition would also like to push through a controversial measure to eliminate costly fuel subsidies, but rising prices have made that politically difficult.

India’s industrial output has enjoyed double-digit growth for seven straight months, as strong investment activity returns Asia’s third largest economy to pre-crisis levels of growth.

Iron and steel prices were 20.0 percent higher in May than a year ago, the government said, promising to further squeeze automaker margins.

Surprisingly, prices in export-oriented items, like cotton textiles — which spiked 20.7 percent — and wood products — which rose 8.8 percent — have also been under pressure.

The central bank now faces a complex situation. Even as inflation spreads, domestic liquidity is under acute temporary pressure because of advance tax payments and telecom companies paying out for third generation and wireless spectrum.

HDFC Bank calculates that, taken together, those payments, including advance tax, total up to 1.5 trillion rupees ($31.8 billion). Most of that will be funded by banks, as India still doesn’t have a deep corporate bond market.

Economists say the liquidity crunch will make it hard for the central bank to further raise key interest rates before its July meeting, no matter how much policymakers might like to tame inflation.

HDFC Bank expects the Reserve Bank of India to raise key rates by 25 basis points each in July, but not before, and to leave the cash reserve ratio untouched because of the short-term squeeze on liquidity.

ERIKA KINETZ,AP Business Writer MUMBAI, India (AP)