Inflation is settling in. Now for the interest rate hike

The latest Consumer Price Index (CPI) figures for October reveal an unsettling trend. Year-on-year, overall inflation rose by 6.09 per cent, while food prices surged by 8.94 per cent. This marks the highest inflation since October 2024, surpassing the Reserve Bank of India's (RBI) 6 per cent upper limit. The situation is particularly dire in the food sector, with annual price increases reaching their highest point since November 2024, even exceeding the 9.04 per cent peak from that same month.

The broadening of inflation is evident in the rising costs of dining out. In January 2026, for instance, retail inflation in the food and beverage sector at restaurants jumped from 2.88 per cent to a staggering 10.09 per cent, a stark indication of escalating expenses due to factors like more expensive cooking fuel and rising food prices.

For the RBI, the path forward is clear but challenging. With inflation not only present but also spreading across various sectors, a mere 25 basis point increase in the current policy repo rate of 5.5 per cent might not suffice. Although Brent crude prices have softened to between $95-96 per barrel, down from a peak of $118 at month-end, and the Indian rupee has strengthened to 94.2 per dollar - a positive shift following renewed optimism around potential diplomatic resolutions to conflicts in Iran and Ukraine - these external gains are being tempered by a "super strong" El Niño event.

India experienced a similar high food inflation episode from July 2023 to December 2024, averaging over 8.5 per cent year-on-year, coinciding with a "strong" El Niño. The current event is even more intense and expected to persist through January-March 2027.

Thus, while the RBI can contribute to anchoring inflation expectations from the demand side, the government must also play its part. Supply-side management is crucial given that virtually every agricultural product, from edible oils and pulses to milk, maize, cotton, and sugar, is currently facing supply constraints domestically.

Allowing imports at low or even zero duties could significantly alleviate the situation. In such circumstances, prompt decision-making, backed by robust market intelligence, could yield significant economic and political benefits, something the government is keen to avoid.