Retail inflation in the country, driven by a spike in food prices and a fading base effect, climbed to a nine-month high in September. At the same time, wholesale inflation, which reflects factory gate prices, also picked up pace. The wholesale price inflation rose to 1.84 per cent in September as food items, especially vegetables, turned costlier, as per the government data released on October 14. The wholesale price index (WPI)-based inflation was 1.31 per cent in August. It was (-)0.07 per cent in September last year. Inflation in food items shot up to 11.53 per cent last month against 3.11 per cent in August. This was led by 48.73 per cent inflation in vegetables as against (-)10.01 per cent in August.
Inflation in potato and onion continued to be high at 78.13 per cent and 78.82 per cent, respectively in September. Food prices have always played a significant role in shaping India’s inflation picture. The current consumer price inflation (CPI) basket assigns a weight of 46 per cent to food, a figure that many argue needs to be revisited as consumption patterns evolve. As a significant portion of 1.4 billion people spend most of their income on food, India’s inflation index is heavily influenced by food prices. Prices of key vegetables such as onion, tomato and potato have risen. Concerns also persist regarding the impact of weather variations on inflation and economic stability. A higher food inflation number could keep overall inflation from declining significantly.
The Reserve Bank of India (RBI) in its latest bulletin said volatility in food prices remains a contingent risk even as recent easing in retail prices will help boost private consumption. Apart from food price pressures, inflation risks arise from the external sector. The potential for a broadening conflict in West Asia could disrupt supply chains and impact global energy prices, which would have ripple effects on the domestic economy. The RBI, which mainly takes into account retail inflation while framing monetary policy, kept benchmark interest rate or repo rate unchanged at 6.5 per cent in its monetary policy review earlier this month.
During the latest rate-setting panel meeting, the Monetary Policy Committee (MPC) of RBI left its inflation forecast for this fiscal year (FY25) unchanged at 4.5 per cent, even amid caution on food price trajectory that may hurt core inflation along with geopolitical tensions which pose a threat to any comfort on crude prices. The significant rebound in September’s CPI-based inflation diminishes the likelihood of a rate cut following the October policy change. For a rate cut in the December policy review, either the CPI-based inflation will need to flatten considerably below 5 per cent in the next print or GDP growth for Q2FY25 will need to significantly undershoot the MPC’s expectations.
