Will October inflation push Q3 print above RBI’s forecast?

At 6.21%, retail inflation in October breached the upper limit of the Reserve Bank of India’s target, for the first time since August 2023, thanks to an alarming rise in vegetable prices.

A Mint poll of 18 economists had projected inflation to be at 5.95% for the month.

With a higher-than-expected print, inflation may very well be on track to surpass RBI’s forecast of 4.8% for the October-December quarter. A back-of-the-envelope calculation suggests inflation would have to average just 4.1% in November and December to align with RBI’s forecast.

According to ICRA chief economist Aditi Nayar, inflation is expected to exceed the Monetary Policy Committee’s estimate for the third quarter by at least 60-70 basis points. “A rate cut in the December policy review appears ruled out, in spite of our projection of a sub-7% GDP growth print for July-September,” Nayar added.

Also read | India’s 14-month high retail inflation fades hope of December rate cut

Economists also expected the central bank to raise its inflation forecast for the current quarter in the December policy. Between April and October, inflation has averaged 4.8%, higher than RBI’s projection of 4.5%.

Inflation surged in October mainly due to a sharp rise in food prices, especially vegetables and edible oils. Food inflation rose to 10.87% in October from 9.24% the previous month.

The rise was more alarming in vegetable inflation, which surged to a near five-year high of 42.18%. The increase in import duties of edible oils also reflected significantly, with inflation for oils and fats reaching its highest since June 2022.

Apart from the food and beverages group, the increase was also substantial in the miscellaneous group. It recorded 4%-plus print for the second straight month.

The base effect also played a role in pushing inflation upwards in October. The Consumer Price Index (CPI) was lower in September 2023 and October 2023 compared to July and August of last year, leading to higher inflation in September and October this year.

With prices of food continuing to be high in November so far, economists expect a 5%-plus print in November as well, which will make meeting RBI’s forecast difficult.

“We expect the uptick in food prices to keep the headline inflation higher than 5% even in the next reading, before seasonal downturn begins to bring down inflation,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.