India’s Retail Inflation Analysis

By Anant Chandak and Rahul Trivedi
BENGALURU (Reuters)
India's retail inflation in September likely exceeded the Reserve Bank of India’s (RBI) 4% medium-term target, primarily due to a sustained increase in vegetable prices and a lower year-ago base, according to a Reuters poll.

Food prices, particularly for vegetables and perishables, rose as heavy rains diminished the availability of essential crops. The previously high base from the last year, which helped lower inflation in July and August, became a low base last month, reversing its impact on inflation levels.

A Reuters poll conducted from Oct. 3-9 among 48 economists predicted that retail inflation, measured by the consumer price index (CPI), increased to 5.04% in September from 3.65% in August. The forecasts varied between 3.60% and 5.40%. The official data will be released on Oct. 14 at 1200 GMT.

Dipanwita Mazumdar, an economist at Bank of Baroda, stated, "September's reading will bear the brunt of a persistent spike in vegetable prices, especially tomatoes and onions. Even edible oil prices are witnessing momentum due to an increase in international prices. All these factors may exert upward pressure on headline inflation."

Furthermore, the separate Reuters poll indicated that inflation could average 4.6% this quarter and 4.5% for the fiscal year, both above the RBI's target.

Core inflation, excluding volatile items such as food and energy, was anticipated to rise to 3.50% in September from 3.30% in August, contributed to by increased telecom tariffs and higher gold prices.

Rahul Bajoria, head of India and ASEAN economic research at Bank of America, noted, "Persistent weakness in core CPI indicates growing economic slack, reflected in rising discounts on motor vehicles and recent earnings from fast-moving consumer goods companies, showing a lack of pricing power."

Benign core inflation may allow the RBI, which maintained interest rates unchanged recently, to consider rate cuts as early as December. Most major central banks, including the U.S. Federal Reserve, have already begun an easing cycle.

Gaura Sengupta, chief economist at IDFC Bank, remarked, "By the time RBI meets in December, they will likely have a month of favorable food price data, with potential cuts from the Fed. This context could provide the RBI with room for policy easing."