India Sept inflation nears RBI tolerance ceiling, boosting case for further rate hikes

In a recent development, India's retail inflation reached 5.54% in September, data revealed on Monday, bringing the metric close to the upper limit of the central bank's 2%-6% tolerance range. This development bolsters the argument for additional rate hikes, as geopolitical tensions and weak monsoon conditions impact the economy.

The September figure slightly exceeded economists' expectation of 5.4%, marking the fourth month in a row where inflation surpassed the Reserve Bank of India's (RBI) 4% medium-term target. Inflation peaked at 4.83% in August.

The surge in September is partly attributed to base effects, as last year's lower price levels make current inflation appear higher. In response to elevated inflation expectations and expanding price pressures, the RBI increased its benchmark repo rate by 25 basis points to 5.5% last week, its first hike in nearly four years. RBI Governor Sanjay Malhotra forecasted headline CPI inflation to average around 5.8% over the next three quarters, prompting an upward revision of the inflation forecast to 5.2% for fiscal 2027 from 5% earlier.

Malhotra cautioned that a weak monsoon and strong El Nino conditions could jeopardize agriculture and rural demand, though sufficient foodgrain reserves and government interventions are anticipated to mitigate these effects. Rising crude oil prices, with Brent futures surpassing $100 a barrel, and a deficient monsoon have fueled concerns over food supply.

Food inflation surged to 7.74% in September, up from 5.97% in August, primarily due to increased prices of essential items like onions, ginger, and garlic. Transport inflation also climbed to 5.01% in September, compared to 4.6% a month prior.