Eye on the price: Retail inflation at 5.54% in September, most on new base

New Delhi: India's retail inflation climbed to 5.54% year-on-year in September, the highest for the gauge since January, raising the probability of further increase in policy rates as economists warn of increasing price pressures.

Inflation remained above the 4% central target of the Reserve Bank of India (RBI) for the fourth consecutive month, driven by higher food prices, data published on Monday by the statistics ministry showed.

RBI has a tolerance band of 2 percentage points on either side of the 4% level.

"While the monsoon has turned out to be fairly dismal, with inadequate replenishment of reservoirs clouding the outlook for rabi (winter crop) sowing, another rate hike in December seems quite certain," said Aditi Nayar, chief economist, ICRA. "Crude oil prices remain elevated, and their trajectory will keenly influence the likelihood and extent of further rate tightening in 2027."

Also Read: Inflation could hit 7%, forcing RBI to hike rates by 150 bps further: Report

Food Prices Pressurise

Economists expect inflation to approach 6% in the coming months, raising expectations of a 25-basis point rate increase at the next policy review. Last week, the central bank's Monetary Policy Committee (MPC) raised the policy rate by 25 basis points to 5.5% in the first such increase in nearly four years.

One basis point is a hundredth of a percentage point.

Consumer inflation, which is the reference frame for India's rate-setting panel, stood at 4.8% in August. The revised Consumer Price Index (CPI) series, with 2024 as the base year, was introduced in January.

At its latest policy review last Wednesday, the central bank raised its current fiscal-year consumer inflation forecast by 20 basis points from its earlier estimate to 5.2%. It also raised the full-year growth estimates by 40 basis points


Also Read: RBI survey: Household inflation expectations hit 10% for next year

"Inflation in September rose on the back of higher food inflation, visible in rising onion prices as well as other food items like sugar, milk and cereals," said Sakshi Gupta, principal economist, HDFC Bank. Furthermore, she said, consumer inflation increased in part due to last year's across-the-board goods and services tax (GST) reduction, which lowered the year-ago base. Consumption levies were slashed with effect from September 22 last year.

Food inflation rose sharply to 7.7% from 6% in August. Rural food inflation was 8.1%, higher than 7.2% in urban areas. Food prices are expected to remain firm in the coming months as uneven rainfall threatens farm output.

Overall inflation rose more sharply in rural areas, climbing to 6.1% in September from 5.2% in August. Urban inflation increased to 4.9% from 4.3%.

Among states and union territories, Tamil Nadu recorded the highest inflation of 6.8%, followed by Odisha (6.7%), Madhya Pradesh (6.7%), Telangana (6.6%), and Andhra Pradesh (6.3%).

Food Items, Services

Among the 12 consumption-based divisions, personal care, social protection and miscellaneous goods and services recorded the highest inflation at 13.8%. Next came restaurants and accommodation services at 9.4%, followed by food and beverages (7.4%), transport (5%), and paan, tobacco and intoxicants (4.8%).

Among food items, onion prices surged 108.1% year-on-year in September, followed by ginger (62.9%), garlic (54.6%), and lemon (36.4%).