By Shubham Batra and Shivangi Acharya
NEW DELHI, Nov 12 (Reuters) – India’s retail inflation surged to 6.09% in October, breaching the central bank’s 6% limit for the first time under the new series, as rising food prices squeezed household budgets and raised bets on further rate hikes.
Inflation has stayed above the Reserve Bank of India’s 4% medium-term target for five straight months and had last breached 6% two years ago under an earlier CPI series.
“The data reinforces our expectation of a second successive rate hike in December,” said Radhika Rao, senior economist and executive director at DBS Bank, adding that inflation is yet to peak.
Last month, the RBI joined global peers by raising its benchmark repo rate for the first time in nearly four years, citing elevated inflation expectations and broadening of price pressures.
Aditi Nayar, chief economist at rating agency ICRA, said a further 25-basis-point hike in December appeared “almost certain”. India’s policy rate stands at 5.50%.
Economists had forecast inflation to rise to 5.93% in October from 5.54% in September, according to a Reuters poll.
The October print was driven largely by food prices, which account for nearly 40% of India’s consumer price index. Food inflation rose to 8.94% in October from 7.74% in September as prices of staples such as onions, garlic and ginger climbed.
The bond market showed a muted reaction to the data, with the 10-year bond holding at 7.25% as traders maintained bets on about 100 basis points of rate hikes.
The rupee, which has recovered in November after threatening to breach record lows last month, is getting help from lower oil prices and a rebound in foreign portfolio inflows.
The RBI expects inflation to average 6% in the October-December quarter and forecasts it at 5.2% in the current financial year.
Minutes of the RBI rate-setting committee’s meeting indicated that further rate hikes may be needed to contain inflation but policymakers stopped short of endorsing an aggressive tightening cycle, citing risks to economic growth.
RBI Governor Sanjay Malhotra has warned that a weak monsoon and strong El Nino conditions pose risks to agriculture and rural demand, although ample foodgrain stocks and government measures are expected to cushion the impact.
PRICE PRESSURES WIDENING
Inflationary pressures broadened in October, with 19 of 43 index sub-groups recording inflation of 4% or higher, compared with 14 in September.
Beyond food, higher inflation was led by transport-related costs, clothing, housing and food-serving services.
Brent crude futures have fallen to around $92 a barrel, offering some relief as markets weigh hopes of de-escalation in the Iran war. India is the world’s third-largest oil importer.
Transport inflation accelerated to 5.84% in October from 5.01% in the previous month.
“Inflation is likely to print above 6% until June 2027. The numbers increase the risk that policy rates may need to rise above the estimated neutral rate of 6%,” said Tanay Dalal, an economist at Axis Bank.
Core inflation, which strips out volatile components such as food and fuel, accelerated to 4.5% in October, according to IDFC First Bank, from 4.3% in September.
The RBI says core inflation will average 4.4% this fiscal year.
(Reporting by Shubham Batra and Shivangi Acharya in New Delhi, additional reporting by Jaspreet Kalra in Mumbai; Editing by Nivedita Bhattacharjee and Mrigank Dhaniwala)
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