The sharp reversal in consumer inflation from a five-year low of 3.6% in July and 3.65% in August has dented hopes of interest rate cuts.
Food inflation shot up to 9.24% in September from 5.66% in August. Wholesale inflation also ticked up to 1.84% in September from a four-month low of 1.31% in August. “We still believe there is a low probability of monetary easing in the rest of FY25,” said DK Pant, chief economist, India Ratings & Research. “Even if there is a rate cut, it will be symbolic and shallow.”
The Reserve Bank of India (RBI) kept the key rate unchanged at 6.5% for the 10th review in a row by the Monetary Policy Committee on October 9, but shifted its stance to “neutral”, indicating potential future rate adjustments.
“We anticipate that there are chances of a shallow rate cut of 25 bps in the December policy, followed by another 25 bps in the February policy, provided food inflation moderates,” said Rajani Sinha, chief economist, CareEdge. The MPC meets next on December 4-6. The average consumer inflation rate was 4.2% in the second quarter of the current financial year, closely aligning with the central bank’s projection of 4.1%.
On a sequential basis, inflation based on the Consumer Price Index (CPI) was up 0.62%, while the food index rose 1.04%. CPI inflation was up in rural and urban areas by 5.9% and 5.1%, respectively. In September 2023, CPI inflation was at 5%. Core inflation—a measure of inflation without volatile fuel and food items and seen as an indicator of demand pressures—hit an eightmonth high of 3.5% in September from 3.12% in May 2024.
Further escalation in conflict in West Asia can add to inflationary pressures, economists said.
The share of imported inflation in the overall number has already risen, a State Bank of India Research note pointed. “The imported inflation has registered a growth of 2% in September, which is the highest reading in the last 13 months,” it said, adding that gold, oils and fats and chemical products were major contributors to imported inflation. The higher food inflation was largely due to the surge in vegetable inflation at 36% in September compared with 10.75% in the month before