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India's inflation rate has risen to a 14-month high, reaching 6.21% in October 2024, according to the Reserve Bank of India's (RBI) monetary policy announcement. This surge is primarily attributed to a significant increase in food prices, which jumped to 10.9%, exceeding the upper tolerance level of 6% set under the flexible inflation targeting (FIT) framework.
While the RBI expects the overall inflation to average 4.5% for FY25, the volatility of food prices, particularly in rural and hilly regions, presents significant challenges in controlling inflation. The weight of food inflation in the overall CPI basket, at around 45%, heavily influences the index. Despite a projected moderation to 4.3% in Q1 of FY26, achieving the target of 4% inflation remains a significant hurdle.
Despite the rise in inflation, the Indian economy continues to display resilience, with a GDP growth rate of 8.2% in FY24. However, there are emerging signs of weakness. The GDP growth in Q1 of FY25 dipped to 6.7%, the lowest in the last five quarters. While the slowdown in Q1 could be attributed to election-related constraints on government spending, certain high-frequency indicators suggest a broader economic slowdown.
The RBI revised its GDP outlook for Q2 to 6.8%, down from its earlier projection of 7%, due to the impact of heavy rains in several regions. Nonetheless, the RBI maintains its FY25 forecast at 7.2%. The IMF also retains its GDP outlook for India at 7% for FY25 and 6.5% for FY26.
Positive factors contributing to the economic outlook include a robust industrial growth rate, driven by the Index of Industrial Production (IIP), which surged to 3.1% in September. The agriculture sector is also expected to see growth of 5% due to a good monsoon and favorable terms of trade for agricultural products. The composite S & P PMI for India reached 59.10 in October, indicating a strong economic sentiment. The service and manufacturing sectors also exhibit positive growth trends.
The external sector dynamics provide a mixed picture. Inflation has been softening globally, with seven out of ten major developed market central banks initiating interest rate cuts. The global economy is shifting towards a lower interest rate regime. However, the resurgence of inflation in October, coupled with geopolitical risks and uncertainties surrounding the US economic policy under the new leadership, pose challenges to the inflation trajectory.
Despite the rising inflation and economic slowdown concerns, the RBI has maintained the repo rate at 6.5% for now. The central bank has indicated that a change in monetary policy stance in October does not necessarily guarantee a rate cut in December. The future course of action will depend on the evolving inflation trajectory. The current situation leaves markets disappointed, as they anticipated a near-term relief in interest rates. Balancing inflation and growth dynamics remains a key challenge for the Indian economy.