India's retail inflation rose to 4.62 percent in October, hitting its highest level in the last 16 months and surpassing the Reserve Bank of India's medium-term target of 4 percent. This acceleration is largely due to a rise in food prices—onions in particular. The food inflation is now almost close to 8 percent in October, compared to 5 percent in September. The only bright spot is core inflation which has eased in October to 3.5 percent bolstering hopes.
October CPI inflation is the highest since June 2018 and higher than expected. For two-three months in a row, inflation is surprising on the upside.
The second and more important point is that it is higher than the monetary policy committee’s (MPC) mandated level of 4 percent. The MPC is mandated by law to keep inflation around 4 percent. Now, it is going to be difficult for the MPC to cut rates because the inflation level is above RBI trajectory and above its own given mandate.
Yet, the inflation is largely driven by food – 7.8-7.9 percent is the October food inflation and vegetable inflation is 26 percent. Therefore, the MPC can explain that the higher CPI number is, largely, because of one onion crop getting ruined by unseasonal floods. The core inflation which represents producer pricing capability is down to 3.5 percent, which is the lowest since the new inflation index started.
Clearly, given the terrible industrial output numbers, the expected low gross domestic product (GDP) numbers and the poor core inflation number, the MPC has enough space to argue that it can overlook this seasonal rise in onion prices and vegetable prices as a one-off and as temporary and continue to cut rates.
That said, it does look like the monetary policy committee is somewhere at the end of its rate-cutting cycle given the trajectory in inflation and given that even globally, the Fed has signalled a pause. So perhaps the MPC will have to signal a pause sooner or later.