India’s inflation breaches central bank’s 6% limit, bolsters case for rate hikes

India’s retail inflation surged to 6.09 per cent in October, breaching the central bank’s 6 per cent limit for the first time under the new series, as rising food prices squeezed household budgets and raised bets on further rate hikes.

Inflation has stayed above the Reserve Bank of India’s 4 per cent medium-term target for five straight months and had last breached 6 per cent two years ago under an earlier CPI series.

“The data reinforces our expectation of a second successive rate hike in December,” said Radhika Rao, senior economist and executive director at DBS Bank, adding that inflation is yet to peak.

Last month, the RBI joined global peers by raising its benchmark repo rate for the first time in nearly four years, citing elevated inflation expectations and broadening of price pressures.

Aditi Nayar, chief economist at rating agency ICRA, said a further 25-basis-point hike in December appeared “almost certain”. India’s policy rate stands at 5.50 per cent.

Economists had forecast inflation to rise to 5.93 per cent in October from 5.54 per cent in September, according to a Reuters poll.

The October print was driven largely by food prices, which account for nearly 40 per cent of India’s consumer price index. Food inflation rose to 8.94 per cent in October from 7.74 per cent in September as prices of staples such as onions, garlic and ginger climbed.

The bond market showed a muted reaction to the data, with the 10-year bond holding at 7.25 per cent as traders maintained bets on about 100 basis points of rate hikes.

The rupee, which has recovered in November after threatening to breach record lows last month, is getting help from lower oil prices and a rebound in foreign portfolio inflows.

The RBI expects inflation to average 6 per cent in the October-December quarter and forecasts it at 5.2 per cent in the current financial year.

Minutes of the RBI rate-setting committee’s meeting indicated that further rate hikes may be needed to contain inflation but policymakers stopped short of endorsing an aggressive tightening cycle, citing risks to economic growth.

RBI Governor Sanjay Malhotra has warned that a weak monsoon and strong El Nino conditions pose risks to agriculture and rural demand, although ample foodgrain stocks and government measures are expected to cushion the impact.

Price pressures widening

Inflationary pressures broadened in October, with 19 of 43 index sub-groups recording inflation of 4 per cent or higher, compared with 14 in September.

Beyond food, higher inflation was led by transport-related costs, clothing, housing and food-serving services.

Brent crude futures have fallen to around $92 a barrel, offering some relief as markets weigh hopes of de-escalation in the Iran war. India is the world’s third-largest oil importer.

Transport inflation accelerated to 5.84 per cent in October from 5.01 per cent in the previous month.

“Inflation is likely to print above 6 per cent until June 2027. The numbers increase the risk that policy rates may need to rise above the estimated neutral rate of 6 per cent,” said Tanay Dalal, an economist at Axis Bank.

Core inflation, which strips out volatile components such as food and fuel, accelerated to 4.5 per cent in October, according to IDFC First Bank, from 4.3 per cent in September.

The RBI says core inflation will average 4.4 per cent this fiscal year.