Days after RBI rate hike, data shows inflation jumped to 5.54% in September

In the days following the Reserve Bank of India's (RBI) rate hike, data revealed that India's inflation rate soared to 5.54% in September, a significant jump from 4.83% in the previous month of August. This increase occurred just a few days after the RBI raised interest rates for the first time in over three and a half years. The rise in headline inflation can be attributed to a combination of factors, including a broader-based increase in prices and an unfavorable base effect.

Food prices saw a sharp rise, reaching 7.74% in September from 5.97% in August. Overall, inflation, as measured by the Consumer Price Index (CPI), continues to set new records, with 2024 serving as the base year. The RBI is obligated to maintain CPI inflation within a range of 4% and 6%. However, this is the fourth month in a row that inflation has exceeded this target.

The central bank recently raised the policy repo rate by 25 basis points (bps) to 5.5%, anticipating CPI inflation to average 4.9% in July-September, 6% in October-December, 5.7% in January-March 2027, and 5.6% in April-June 2027. Furthermore, the RBI expects CPI inflation to average 4.9% in July-September, 6% in October-December, 5.7% in January-March 2027, and 5.6% in April-June 2027.

Additionally, the central bank has tightened its monetary policy stance to 'calibrated tightening' from 'neutral', acknowledging signs of elevated inflation expectations and generalization of inflation, although limited evidence of supply-side pressures embedding themselves in pricing behavior. Despite these concerns, the RBI noted that demand-side pressures are still limited, with strong growth in monetary and credit aggregates posing risks.

Loan growth is accelerating, while the Indian economy is outperforming expectations, with GDP growth in April-June reaching a rate of 7.8%, which led to the global organizations and agencies raising their fiscal year forecasts to approximately 7%. This growth has prompted the RBI's Monetary Policy Committee (MPC) to consider several rate hikes in the coming months, with economists predicting the central bank may only cease its policy changes when the repo rate reaches 6-6.25%. The September inflation data will only fuel these calls for further rate increases.