India’s Retail Inflation Eases to Three-Month Low in September
Softer Vegetable Prices Drive Retail Inflation Down
India’s retail inflation has reached a three-month low in September, mainly due to a decrease in vegetable prices. However, it still remains above the central bank’s target of 4%, which is crucial for any potential interest rate cuts. The annual retail inflation for September stood at 5.02%, a decline from the previous month’s 6.83%. Economists had predicted a rate of 5.50%. In comparison, the inflation rate in June was 4.81%.
Food Inflation Witnesses a Significant Drop
Food inflation, accounting for nearly half of the overall consumer price basket, rose 6.56% in September, a decrease from August’s 9.94%. Although September’s inflation rate fell within the Reserve Bank of India’s (RBI) upper tolerance band of 2%-6%, the central bank has maintained its stance on targeting an inflation rate of 4%, emphasizing that a rate below 6% may not be sufficient to warrant interest rate cuts.
Vegetable and Cereal Inflation Shows Improvement
Vegetable prices, which were the primary driver of elevated inflation in the past two months, have significantly dropped to 3.39% in September from 26.14% in the previous month. Similarly, cereal inflation has eased to 10.95% in September from 11.85% in August. The Indian government had previously banned wheat exports last year.
Central Bank’s Hawkish Stance Remains
Despite the decline in headline inflation, experts believe that the RBI will continue its hawkish rhetoric as long as the risk of food price increases persists. Thamashi De Silva of Capital Economics highlights that India’s recent drought and the resulting driest monsoon in five years contribute to the ongoing food inflation threat. Additionally, the government has raised the cooking gas subsidy for low-income households to mitigate inflationary pressure.
Global Uncertainties May Impact Inflation
Indian Finance Minister Nirmala Sitharaman, speaking at the World Bank’s Development Committee Plenary in Morocco, expressed concerns about global and regional uncertainties that could keep inflationary pressures elevated in the coming months. She emphasized the need for increased vigilance from the government and the RBI, stating that the government has already taken preemptive measures to address food inflation.
Core Inflation and Conflict Risks
Core inflation, excluding volatile food and energy prices, is estimated to be 4.5% in September. However, economists remain cautious about the impact of the El Nino weather phenomenon on crop output in Asia and the ongoing Israeli-Palestinian conflict, which could further affect inflation. Price pressures are still present in certain food items, with pulses and product prices rising to 16.38% in September and spices remaining sticky at over 23%.
Future Outlook and RBI’s Monetary Policy
Economists predict that the RBI will maintain its repo rate unchanged until June 2024. The central bank will closely monitor various factors, including crop output, energy prices, and geopolitical tensions, to determine the course of its monetary policy.
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