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India's retail inflation, as measured by the Consumer Price Index (CPI), soared to a 14-month high of 6.21% in October, up from 5.49% in September. The primary culprit behind this surge is the sharp increase in prices of key food items, particularly vegetables – notably tomatoes – and edible oils. This spike in inflation, significantly exceeding analysts' expectations and surpassing the upper band of the Reserve Bank of India's (RBI) tolerance range after a 13-month hiatus, has effectively dashed hopes of a rate cut in December.
Contributing to the headline inflation figure was a rise in core inflation, which excludes food and fuel prices. Core inflation climbed to a 10-month high of 3.7% in October, up from 3.5% in September. This indicates that price pressures are not confined solely to the food sector.
In light of the elevated inflation, analysts now anticipate a more cautious approach to monetary easing from the RBI, with February emerging as a potential starting point. However, the outlook remains uncertain, particularly given the possibility of a surge in global commodity prices.
The significant jump in food inflation, reaching a 15-month high of 10.87% in October, is driven by a dramatic increase in vegetable prices (42.18%, up from 35.99% in September) and oil and fats prices (9.51%, up from 2.51% in September). Even cereal inflation, although rising slightly to 6.94% in October from 6.84% the previous month, contributes to the overall upward trend.
The sharp rise in tomato inflation in October, skyrocketing to 161.27% (compared to 42.9% in September), is attributed to supply disruptions caused by heavy rainfall in key producing states like Karnataka and Maharashtra. However, prices have moderated in November due to the arrival of fresh supplies from Madhya Pradesh and Himachal Pradesh. Analysts anticipate a moderation in vegetable inflation in the coming months, driven by a favorable base effect and the onset of winter.
Despite the expected easing of vegetable prices, edible oil prices are unlikely to cool down anytime soon due to India's dependence on imports. The government's decision to raise basic customs duty for various types of crude edible oils to 20% from nil in mid-September, and for refined oils to 32.5% from 12.5%, aims to support domestic oilseeds farmers.
While the arrival of the fresh harvest is expected to ease inflationary pressures on food prices, the outlook for rabi sowing is promising with reservoir levels higher than last year in most regions, except for certain northern states like Punjab and Himachal Pradesh.
Furthermore, subdued global commodity prices amidst concerns over slower global demand are likely to contribute to a moderation in headline inflation going forward. In October, the global commodity price index declined by 4.3% year-on-year, while Brent crude prices fell by 15% year-on-year.
Source: Inflation at 14-month high cloud outlook on monetary easing