India’s inflation probably breached RBI target last month
Indian retail inflation probably exceeded the Reserve Bank of India’s ( RBI) medium-term target of 4% in October for the first time in 15 months, mainly because of rising vegetable prices, a Reuters poll of economists showed.
Prices of most vegetables climbed during the month as monsoon downpours delayed harvests and disrupted supplies. That was despite a government ban on onion exports, a key component in the Indian diet.
Overall food prices – the biggest chunk of the consumer price basket – also rose in October.
The Nov. 4-7 Reuters poll of 39 economists forecast annual consumer price inflation rose to 4.25% in October, its highest since June 2018 and above 3.99% in September.
Nearly 85% of respondents forecast retail inflation, due on Nov. 12, to breach the RBI’s medium-term target.
“Vegetable prices, particularly that of onions and tomatoes, will contribute significantly to the rise in inflation,” said Teresa John, economist at Nirmal Bang, a retail brokerage.
“We expect the RBI to maintain its easing bias on the back of sluggish growth and weak core inflation pressures despite rising headline inflation led by food prices.”
The RBI has cut its key interest rate by a cumulative 135 basis points this year to 5.15%. The central bank is expected to cut the repo rate in December for the sixth meeting in a row, according to a separate Reuters poll. That view primarily stems from a slowing economy.
Despite easy monetary and fiscal policy, recent business surveys indicate the economy, which slowed to a six-year low of 5% growth during the second quarter, is still struggling and is not expected to recover anytime soon.
If those forecasts are realised, it will be the first time since October 2016 the RBI has cut rates even though inflation is above the central bank’s medium-term target.
“I think their (RBI) objective now and their policy equation is focused on reviving growth, and they have been very forthcoming in communicating that,” said Sakshi Gupta, senior India economist at HDFC Bank.
“So, I think they still have space to cut rates further right now – given whatever the dynamics of inflation are.”
The wholesale price index probably remained flat last month, the lowest in nearly three and a half years. The WPI was the preferred gauge for the RBI before the consumer price index was introduced on early 2012.
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