At 6.09%, retail inflation breaches RBI's upper tolerance limit after two years

On October 6, the retail inflation rate in India touched 6.09%, surpassing the Reserve Bank of India's (RBI) upper tolerance limit of 6% and marking the first breach in two years. This surge in prices follows a trend where inflation has consistently remained above the RBI's target of 4% for five consecutive months. Economists anticipate the RBI will likely raise interest rates again following the Monetary Policy Committee's meeting in December.

The central bank had forecasted a full-year inflation rate of 5.2%, with the Consumer Price Index (CPI) projected to rise to 6% in the current quarter, followed by a decline to 5.7% in the January-March quarter.

The primary driver behind this inflation spike is food inflation, which rose to 8.9% in October. The prices of essential items such as onions, garlic, and ginger experienced sharp increases, with onions surging by 116%, garlic by 60%, and ginger by 48%. Moreover, the inflation became more widespread as 11 out of the 12 food categories recorded a price increase.

Lighter news on vegetable prices slightly alleviated the pressure, with potatoes decreasing by 14%, cauliflower by 10.5%, brinjal by 3.3%, and cabbage by 2% in October.

Six states across India witnessed retail inflation crossing the 7% threshold, with southern states leading the charge. Tamil Nadu and Telangana recorded inflation rates of 7.3% and 7.25%, respectively, while Karnataka reported 7.1%. Rural inflation was notably higher, averaging 6.6%, compared to urban areas at 5.4%. Aditi Nayar, ICRA chief economist, predicts that food inflation will remain elevated in November, attributed to the influence of milk, sugar, and onion prices, alongside a poor monsoon leading to reduced water levels in reservoirs, which have heightened concerns about the upcoming rabi crop.

Bank of Baroda chief economist Madan Sabnavis noted that core inflation is also projected to rise in the coming months due to price increases by FMCG companies, coupled with the rise in the cost of mobile phones, televisions, vehicles, and healthcare services. The National Statistical Office (NSO) data highlighted the impact of higher oil prices resulting from the ongoing conflict in the Middle East, even as crude prices have softened.

This inflationary pressure is evident in sectors such as transport (5.8%) and restaurants (10.1%), where costs have seen a steady uptick.