India’s retail inflation rose to a five-month high of 7.30 per cent in September on a rise in food prices, well above the Reserve Bank of India’s (RBI) upper tolerance band for the ninth month, a Reuters poll found.
Due to uncertain rainfall and supply shocks from Russia’s invasion of Ukraine, prices of daily consumables such as grains and vegetables, the biggest category in the inflation basket, have climbed over the past two years.
India’s poor and middle class, already grappling with the economic shock induced by the COVID-19 pandemic, will be further affected by this growth as they spend a major chunk of their income on food.
An October 3-7 Reuters poll of 47 economists suggested inflation – as measured by the Consumer Price Index – rose to an annualized 7.30 percent in September, up from 7.00% the previous month. If this happens, it will be the highest after May 2022.
The forecast for the data, due 1200 GMT on October 12, was between 6.60 percent and 7.80 percent. Some 91 percent of economists, 43 of 47, had expected inflation to be 7.00 percent or higher, suggesting that prices had risen further.
Dharmakirti Joshi, chief economist at CRISIL, said: “Food pressure is on the rise. What is even more worrying is that inflation in cereals and pulses, which have been low for some time, will rise at an unprecedented pace.”
“Will monetary policy action be able to control this? Quite honestly, it won’t. It will keep inflation expectations from going higher, but fiscal policy has a bigger role to play.”
The Indian government has introduced measures to pacify local prices, including some export restrictions on rice, to control inflation. But consumer prices have remained volatile and have remained above the RBI’s upper tolerance limit this year.
A weak currency is not helping either. The battered Indian rupee hit a new low of $82.32/$ on Friday and was expected to remain under pressure over the next six months, a separate Reuters poll of FX analysts showed.
This is likely to put pressure on the RBI, which has raised its key repo rate by 190 basis points in four moves this year to accelerate its interest rate hikes.
“Against a more unfavorable global backdrop and a sticky inflation trajectory at home, we now expect a terminal rate of 6.75 per cent – the first 6.25 per cent – in this cycle,” said Sajid Chinoy, Chief India Economist, JP Morgan.
“To the extent the rupee weakens, it will have a positive impact on the CPI trajectory.”