October retail inflation expected to breach RBI’s tolerance

October retail inflation in India is projected to rise to 6.15%, exceeding the Reserve Bank of India’s (RBI) 6% tolerance limit due to persistent food price increases and the fading impact of a high base from last year. A Union Bank of India report noted this rise, with inflation data scheduled for release on Monday. The anticipated uptick in October follows a 5.49% inflation rate in September, driven primarily by higher food costs after a low of 3.65% in August.

The Union Bank report highlights that while the RBI’s recent policy anticipated an October inflation “hump,” the sharp increase may limit any immediate easing. The November inflation rate is also tracking at a high level, suggesting persistent inflation pressures. Consequently, the report expects no rate cuts in the December policy, maintaining the repo rate at 6.5%, with a potential rate cut cycle of 50 basis points beginning in February 2025.

Food prices, especially for vegetables and edible oils, have rebounded in recent months, largely fueling the inflation rise. Looking ahead, the upcoming Kharif harvest season and Rabi crop sowing progress will be crucial in determining food price trends. The report forecasts food inflation to ease in the January-March quarter as winter brings a typical decline in prices and rabi crop prospects improve, which should help bring inflation back to more stable levels.

However, several factors may pose further inflation risks, including potential food supply disruptions, imported inflation in edible oils, and broader economic effects from external tariffs. Policymakers continue to monitor these risks closely, as high food prices complicate efforts to sustainably bring retail inflation down to the RBI’s target of 4%. The repo rate remains elevated to counter inflation, underscoring the RBI’s commitment to managing price stability amid these ongoing pressures.