In charts: September inflation proves why RBI was right to delay a rate cut

A rise in inflation in September was expected as the dissipating base effect would have reversed the comfort seen in the previous two months. However, inflation jumped to a nine-month high of 5.49%, higher than economists’ expectations, as vegetable prices surged sharply during the month.

According to a Mint poll, inflation was seen at a three-month high of 5.1%.

The sharp rise has backed the Reserve Bank of India’s hesitation to cut the policy repo rate as food inflation, especially vegetables, continues to add volatility to the headline inflation and has dampened hopes of a rate cut in December. With the surge in September, inflation for July-September has come in at 4.2%—slightly higher than RBI’s latest projection of 4.1% for the quarter.

“The higher-than-expected September inflation further strengthens the case that RBI will need to remain on the cautious side,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. “The upside surprise to inflation does prompt us to delay our rate cut call into 2025.”

The headline inflation has jumped mainly on account of food inflation, which surged to 9.24% in September from 5.66% the previous month. Core inflation, which excludes food and fuel and light groups, too rose, albeit marginally, and remained below the medium-term aim of 4.0%.

While the base effect faded, with the consumer price index (CPI) falling to 184.1 in September 2023 from 186.2 in August 2023, it rose to 194.2 in September 2024 from 193 in the month prior.

However, the main culprit behind the rise was vegetables, inflation for which jumped to a 14-month high of 35.99% in September. Some pressure also came from oil and fats, which moved from the deflation zone in August to the inflation zone. Fruits and milk and milk products also witnessed higher inflation compared to August.

Moreover, there is likely to be no respite in October as prices of some of the key food items have surged further in October. Tomato prices have jumped to ₹63 per kg in October so far from ₹45.7 the previous month. Edible oil prices have also jumped.

“While an abundant monsoon has reduced the risks related to food grains and some other crops, the volatility in vegetable prices is likely to persist,” said Aditi Nayar, chief economist, ICRA, who expects food and beverages inflation to print above the 8.0%-mark again in October.

“For a rate cut to be forthcoming in the December 2024 policy review, either the CPI inflation will need to flatten considerably below 5.0% in the next print or the GDP growth for July-September will need to significantly undershoot the MPC’s expectations,” Nayar added.

RBI has projected a GDP growth rate of 7.2% for 2024-25. In the first quarter, the GDP growth rate was 6.65%.