Retail inflation hits 14-month high in October, dims rate cut hopes

India’s retail inflation soared to a 14-month high of 6.2% in October, up from 5.5% in the last month, dimming the prospects of an interest rate cut in the Reserve Bank of India’s (RBI’s) December meeting.

The RBI may further delay the timeline for a potential interest rate cut as the Consumer Price Index (CPI)-based inflation breached its 6% upper threshold, analysts said.

The noticeable increase in inflation was primarily led by the food and beverages, followed by a mild uptick in the core items.

Core inflation also saw an uptick of 20 bps to 3.7% in October.

India’s industrial output, on the other hand, rebounded to 3.1% in September, recovering from a contraction of 0.1% in the previous month.

The growth rates observed in mining, manufacturing, and electricity for September 2024 are 0.2%, 3.9%, and 0.5%, respectively.

The September 2023 Quick Estimates of IIP are 146.7, up from 142.3. The September 2024 indices of Industrial Production for the Mining, Manufacturing, and Electricity sectors are 111.7, 147.0, and 206.9.

Retail inflation may push back potential rate cuts

Rajani Sinha, Chief Economist at Care Edge, said that the current trends suggest that inflation in the second half of FY25 may exceed the RBI’s October projections, potentially delaying the start of a rate-cutting cycle.

Aditi Nayar, Chief Economist and head of Research and Outreach at ICRA Ltd, said that with the CPI inflation breaching the 6% mark in October 2024 and expected to exceed the MPC’s estimate for Q3 FY2025 by at least 60-70 bps, a rate cut in the December 2024 policy review appears ruled out, despite our projection of a sub-7% GDP growth print for Q2 FY2025.

Adding that with headline inflation above the upper end of the RBI’s tolerance band, the MPC will remain cautious and will likely maintain the status quo on policy rates in the December meeting, Nayar added, “We anticipate a shallow rate cut cycle of 50 bps may commence in February 2025 or later.”

She added, ” We anticipate that headline inflation will fall below 5% by Q4 FY25, driven by a moderation in food inflation. This would create an opportunity for the MPC to consider a 25-bps reduction in policy rates in the February meeting. For the full year FY25, we expect CPI inflation to average 4.8%.”

Vegetables, fruits, oil contributed to retail inflation

The official data released by the Ministry of Statistics and Program Implementation revealed that Increasing prices of vegetables, fruits, and edible oils were the chief contributors to the hike in retail inflation.

The Consumer Food Price Index (CFPI) recorded a significant year-on-year (Y-o-Y) inflation rate of 10.87% against 6.61% in October 2023, mainly driven by rising prices of vegetables, fruits, oils, and fats.

In September, food inflation stood at 9.24%.  The corresponding inflation rate for rural and urban was 10.69% and 11.09%, respectively, up from 6.63% for both in last year’s comparable period.

Despite a favorable base and benign core inflation, high food inflation has kept the headline inflation elevated.

Sinha said, ” High food inflation led by strong momentum in the prices of vegetables and edible oil remains a cause of concern.”

She added that the surge in vegetable prices, particularly tomatoes and onions, can be attributed to unseasonal rains and extended monsoons in certain parts of the country.

Given their dependence on imports, the rise in global edible oil prices and the recent hike in the basic customs duty on various edible oils have resulted in higher inflation in the basket.

Nayar said that food and beverage inflation surged to an eye-watering 9.7% in October 2024 from 8.4% in the previous month amid an uptick in seven 12 food groups. Vegetable Inflation hardened to a 57-month high of 42.2% from 36.0% in September 2024, which weighed on food and beverages and, consequently, the headline inflation prints in the month.

Excluding vegetables, both these prints were much more benign, at 4.3% and 3.6%, respectively, albeit slightly higher than the readings seen in September 2024.

“It is crucial to manage food inflation, as it directly impacts household inflation expectations. This situation also underscores the need for the government to implement additional supply-side measures to stabilize food prices,” Sinha said.

Will fresh harvest ease inflationary pressures?

 Sinha added that the fresh harvest is expected to ease inflationary pressures on food prices, but reservoir levels in Punjab and Himachal Pradesh remain a concern.

She added that the outlook for rabi sowing is promising. Reservoir levels across most regions remain higher than last year, except in certain northern states such as Punjab and Himachal Pradesh. The higher soil moisture levels resulting from the delayed monsoon withdrawal will also support rabi sowing.

Nayar said that the all-India reservoir storage stood at 86% of the live capacity at full reservoir level (FRL) as of 7 November 2024, which will likely support rabi sowing in the ongoing season. However, she added that concerns related to the low inventory levels of di-ammonium phosphate (DAP) and reservoir storage in some states like Punjab may impede sowing progress and thus are key monitorables for the rabi season.

Global clues need to be monitored

In October, the global commodity price index declined by 4.3% year over year, while Brent crude prices fell by 15% year over year. However, it is crucial to monitor geopolitical developments closely, as these could significantly influence global commodity markets and supply chains.

Sinha cautioned that subdued global commodity prices amid concerns over global demand should further moderate headline inflation.

Industrial Output Data

The IIP expanded by 3.1% year-on-year (YoY) in September 2024 after declining by 0.1% in August 2024 amid a favorable base.

Sinha added that the uptick was broad-based, with all the use-based segments witnessing an improvement in their YoY growth in September 2024 vis-à-vis August 2024.

Nayar added that marginal growth in the mining and electricity output, reversing from a previous month’s contraction, boded well for the IIP rebound. She said that the output of consumer durable and non-durable goods increased by 6.5% and 2%, respectively.