By Shubham Batra
NEW DELHI, Oct 12 (Reuters) – India’s retail inflation accelerated to a higher-than-expected 5.54% in September, data showed on Monday, nearing the central bank’s 6% ceiling and strengthening the case for further rate hikes as the Iran war and a weak monsoon drive price pressures.
Economists had forecast inflation at 5.4% in a Reuters poll. Inflation stood at 4.83% in August.
September’s data also marks the fourth consecutive month inflation has remained above the Reserve Bank of India’s 4% medium-term target and its highest level this year under the current series.
The increase was driven largely by a jump in food prices, with food inflation accelerating to 7.74% from 5.97% in August, as prices of staples such as onion, ginger and garlic rose. Base effects also contributed, as lower prices a year earlier pushed up the annual rate.
The data reinforces the case for more interest rate hikes, said Alexandra Hermann Prasad, Lead Economist at Oxford Economics in London. “With headline inflation clearly continuing to trend up and evidence for price pressures broadening, we expect two 25-basis-point hikes in December and February.”
The RBI joined its global peers last week to raise its benchmark repo rate by 25 bps to 5.5% for the first time in nearly four years, citing evidence of elevated inflation expectations and broadening of price pressure.
The central bank last raised rates in February 2023.
RBI Governor Sanjay Malhotra said after the policy decision that headline CPI inflation is expected to average nearly 5.8% over the next three quarters, prompting the central bank to raise its inflation forecast to 5.2% for fiscal 2027 from 5% earlier.
He also warned that a weak monsoon and strong El Nino conditions pose risks to agriculture and rural demand, although ample foodgrain stocks and government measures are expected to cushion the impact.
Brent crude futures have stayed above $100 a barrel amid the US-Iran war, while a deficient monsoon has heightened concerns over food supplies. Transport inflation accelerated to 5.01% in September from 4.6% in August.
Core inflation, which strips out volatile components such as food and fuel, accelerated to 4.6% in September, according to the rating agency ICRA, as against 4.16% in August.
The RBI projected core inflation to average at 4.4% in fiscal 2027.
“Core gauge aligns with the central bank’s view that price risks are no longer benign. In the face of higher headline prints, we expect the RBI to keep the door open for another rate hike in December 2026,” said Radhika Rao, senior economist at DBS Bank in Singapore.
A weaker rupee, which has fallen around 7% against the dollar and is hovering near its all-time low, adds another layer of inflation risk for the import-reliant economy, according to economists.
(Reporting by Shubham Batra in New Delhi, Additional reporting by Shivangi Acharya and Manoj Kumar in New Delhi; Editing by Janane Venkatraman)
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