India's retail inflation picks up in Sept suggesting further rate hikes

India's retail inflation accelerated in September to a five-month high of 7.41 per cent year-on-year as food prices surged, raising fears of further interest-rate hikes when the RBI meets for its next policy review in December.

The data shows retail inflation remaining above the Reserve Bank of India's target for three quarters, implying it will have to report to the government why it failed to meet the target and what actions it will need to take.

Also read: India's Industrial production slips to 18-month low, contracts 0.8% in August

The RBI's Monetary Policy Committee (MPC), established in 2016, is mandated to keep inflation within 2 percentage points on either side of its 4 pre cent target.

RBI and Prime Minister Narendra Modi's administration agree that inflation was driven by external factors such as surging energy and food prices after Russia's Feb. 24 invasion of Ukraine, officials say, and it would take a longer period to tame prices.

The MPC has raised rates by 190 basis points since May, and economists expect it to raise rates by at least 25 bps at its next meeting Dec. 5-7.

Garima Kapoor, an economist at Elara Capital, said retail inflation was likely to ease to an average of 6 per cent only by January-March.

"We expect the Monetary Policy Committee (MPC) to hike policy repo rate by another 40-50 bps this financial year," she said, and higher inflation could mean further rate hikes.

Annual retail inflation in September was higher than the 7.3% forecast by economists in a Reuters poll, and above 7 per cent the previous month, data released by the National Statistics Office on Wednesday showed.

Food inflation, which accounts for nearly 40 per cent of the CPI basket, rose 8.60 per cent in September, compared to 7.62 per cent in August.

Over 10 per cent depreciation of India's rupee against the dollar this year has made imports costlier for consumers and businesses.

STICKY MANUFACTURING INFLATION

Economists fret that despite rate hikes, inflation could remain sticky at least for a quarter as a pick-up in consumer demand during the festival season starting late September has encouraged companies to jack up prices.

Companies have also raised prices of other goods like smart televisions, mobiles, garments, and footwear to partly cover the rise in input costs earlier this year.

Core inflation, excluding volatile food and energy prices, was estimated at 6.07 per cent-6.1 per cent in September, compared with 5.84 per cent-5.90 per cent estimated in August, said three economists after the data release.

The International Monetary Fund on Tuesday cut its growth forecast for India to 6.8 per cent for 2022/23.