This is the 9th straight month when inflation figures have remained above Reserve Bank of India’s (RBI) tolerance band of 2-6%.
In August, the CPI numbers snapped a 3-month downward trend and accelerated to 7%, mainly on account of rising food prices.
The RBI has been tasked by the government to keep inflation within 2-4% range, with a margin of 2 % on each side.
Amid this rising inflation pressure, the central bank is expected to hike benchmark lending rates further, thereby adding to the financial burden of the common people.
The RBI’s monetary policy committee (MPC) takes into account retail inflation numbers while formulating its bi-monthly monetary policy.
What this means
Since the government has tasked the RBI to maintain inflation at a certain level, it is clear now that it could not control consumer prices within the said range since the past 3 quarters.
Hence, the RBI will now be required to report to the government why it failed to meet the target, and what actions it will take.
Both the central bank as well as government have been in agreement that inflation was driven by external factors including surges in energy and food prices after Russia’s February 24 invasion of Ukraine, and it would take a longer period to tame prices.
Food, energy prices surge
Food inflation, which accounts for nearly 40% of the CPI basket, rose 8.60% year on year in September, compared to 7.62% in August.
Fuel and electricity prices rose 11.44% year-on-year in September, compared with a 10.78% rise the previous month, data showed.
Core inflation, excluding volatile food and energy prices, was estimated at 6.07%-6.1% in September, compared with 5.84%-5.90% estimates in August, said three economists after the data release.
What led to inflation surge
Fueled by erratic rainfall and supply shocks from Russia’s invasion of Ukraine, prices of daily consumables like cereals and vegetables which form the largest category in the inflation basket have climbed over the past two years.
Already reeling from Covid-19 pandemic-induced economic shocks, consumers will be further hit by the increase in prices as they spend a large chunk of income on food, amid the festive season in the country.
The government also introduced certain measures to calm domestic prices, including some export restrictions on rice to temper inflation. But consumer prices have remained defiant and stayed above the RBI’s upper tolerance limit this year.
Besides, a persistently weakening rupee is adding to the woes. The battered Indian rupee hit a new low of 82.32/$ last week and is expected to remain under pressure over the next 6 months.
That is likely to pressure the RBI, which has raised its key repo rate by 190 basis points in four moves this year, to intensify its interest rates hikes.
What RBI had said
While presenting its monetary policy on September 30, RBI governor Shaktikanta Das had retained inflation projection for FY23 at 6.7% amid geopolitical concerns triggered by Russia-Ukraine war, and expected inflation to be under control from January.
The RBI governor said India faces upside risks to food prices, while underlining that cereal price pressure is spreading from wheat to rice in anticipation of lower kharif paddy output.
“The lower sowing for kharif pulses could also cause some pressures. The delayed withdrawal of monsoon and intense rain spells in various regions have already started to impact vegetable prices, especially tomatoes. These risks to food inflation could have an adverse impact on inflation expectations,” the RBI governor had noted.
“If high inflation is allowed to linger, it invariably triggers second order effects and unsettles expectations. Therefore, monetary policy has to carry forward its calibrated action on policy rates and liquidity conditions consistent with the evolving inflation growth dynamics. It must remain alert and nimble,” Das had said.
(With inputs from agencies)
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