The spike in inflation rate in October marked the first time since August 2023 that the print breached the Reserve Bank of India‘s (RBI) tolerance ceiling of 6 per cent. In September, the inflation print had surpassed RBI’s 4 per cent medium-term target for the first time since July at 5.49 per cent.
Food inflation, which makes up around half of the overall Consumer Price Index (CPI) basket, surged to 9.69 per cent in October, up from 9.24 percent in the previous month. Rural inflation also quickened to 6.68 per cent, compared to 5.87 per cent in September, while urban inflation rose to 5.62 per cent from 5.05 per cent the previous month.
A Reuters poll had predicted India’s inflation in October would come close to the 6 percent mark, estimating it at 5.81 per cent. UBS, however, expected the Consumer Price Index (CPI) to climb to 6.15 per cent, breaching the RBI’s target range of 2-6 per cent.
The surge in prices of kitchen staples, particularly onions, has been alarming. Wholesale prices of onions have spiked from Rs 40-60 per kilogram to Rs 70-80 per kilogram, with some regions reporting prices as high as Rs 80 per kilogram as of November 8.
RBI’s Monetary Policy Committee (MPC) had last month changed its stance to neutral, opening the door for potential rate cuts. However, RBI Governor Shaktikanta Das emphasised that a shift to a neutral stance “should not be understood as a potential interest rate cut,” adding that there are “significant upside risks to inflation.”Moving on from the ‘elephant in the room’ analogy for inflation, the RBI Governor in October sayd inflation is the horse and he central bank is in a war.
Food inflation in the September economic review
The Finance Ministry’s economic review for September highlighted that inflation expectations in India are softening, signaling reduced inflationary concerns.
The report noted that both household and business surveys conducted by the RBI and the Indian Institute of Management, Ahmedabad (IIM-A) suggested a stable demand environment, despite the impact of price fluctuations in key food items on headline inflation.
“The headline inflation rate, influenced as it is by a few food items, may not be the most accurate gauge of underlying demand,” the government stated in the report.
This is not the first time this point has been raised by the government. Chief Economic Advisor (CEA) Anantha Nageswaran had previously pointed out the need to exclude food from India’s inflation framework.
In its 2023-24 survey report, the Finance Ministry proposed that India’s monetary policy framework should focus on targeting inflation excluding food, as food prices are more influenced by supply factors than demand.