Inflation crosses RBI’s 6% ceiling; December rate hike back in focus

India’s retail inflation climbed to a two-year high of 6.1 per cent in October, breaching the Reserve Bank of India’s (RBI) upper tolerance limit of 6 per cent. While food prices remain the biggest contributor, inflationary pressures are spreading to other parts of the economy, raising concerns about the possibility of another interest rate hike.

Inflation increased across 11 of the 12 major Consumer Price Index (CPI) divisions in October. Core inflation, which excludes food and fuel, also edged up to 4.5 per cent from 4.3 per cent, indicating that price pressures are no longer confined to food items.

The immediate concern is the rise in food prices, particularly onions and garlic. Weather disruptions associated with El Niño and elevated global food prices have added to the pressure. Higher global energy prices have also pushed up transport costs, while food and cooking fuel expenses have contributed to inflation in accommodation and food services.

“Food remained the primary driver, reflecting El Niño-related weather disruptions and elevated global food prices,” says Rajani Sinha, chief economist, CareEdge Ratings.

The outlook offers little immediate comfort. Low reservoir storage, depleted soil moisture and drought conditions in several states could affect agricultural production. The slow start to rabi sowing has added another layer of uncertainty.

Sinha expects food inflation to remain elevated, peaking at 8.2 per cent in the third quarter of FY27 and averaging around 6.4 per cent for the full financial year. Overall CPI inflation could average around 5 per cent in FY27, with the peak expected in the third quarter.

Food inflation could spread further

The concern is not just how much food prices have risen, but whether the increase begins feeding into other household expenses.

Nirav Karkera, head of research and fund manager, W by Groww, points out that inflation has crossed the RBI’s 6 per cent upper tolerance limit, with food accounting for about half of the increase. This is particularly difficult for rural households, which typically spend a larger proportion of their income on food.

There are, however, some signs of relief beneath the headline number. Excluding food and precious metals, underlying inflation is close to 4 per cent, according to Karkera. Rent, healthcare and education costs have been rising relatively slowly. Gold and silver prices also declined during October, which could ease some inflationary pressure.

But services inflation needs watching. Eating out has already become about 10 per cent more expensive than a year ago, suggesting that higher food and operating costs are beginning to affect businesses and consumers beyond the grocery market.

Fuel is another potential source of concern. Retail petrol and diesel prices at state-run outlets have remained unchanged since May. However, if crude oil prices stay elevated and the rupee remains weak, fuel costs could eventually rise, adding to transportation and distribution expenses.

There has been some improvement in the global outlook, with Brent crude prices moderating following the US midterm election results. However, geopolitical uncertainties and elevated commodity prices continue to pose risks.

Karkera says the impact of GST cuts on year-on-year inflation numbers is now largely behind us. The focus should therefore shift to the pace at which prices are increasing month after month. He does not expect a quick easing of inflation, though winter vegetable supplies could bring some relief early next year.

Will RBI raise interest rates again?

The rise in inflation has brought the RBI’s December monetary policy decision into sharper focus.

With headline inflation above the central bank’s tolerance band and price pressures becoming broader, economists believe the possibility of another rate increase cannot be ruled out.

Sinha sees a likelihood of a 25-basis-point hike in the December policy review, citing rising inflation expectations and widening price pressures. Karkera also believes the odds favour a measured increase.

A rate hike would make borrowing more expensive and could add to the EMI burden of households with floating-rate home loans. It may also influence borrowing costs for businesses at a time when input expenses are already under pressure.

However, the RBI will have to weigh the persistence of inflation against the impact of higher interest rates on economic activity. Much will depend on the trajectory of food prices, the progress of the rabi sowing season and movements in global crude oil prices.

What should investors do?

For investors, the latest inflation reading is not necessarily a reason to make sweeping changes to their portfolios.

Karkera advises sticking to the existing asset allocation. “Those investing in bonds may consider shorter maturities for now, as the prospect of further interest rate hikes could put pressure on bond prices,” he says.

In equities, investors should look for companies that can absorb higher input costs or pass them on to customers without losing business or hurting their profitability.

Much will depend on how food prices move in the coming months and whether global uncertainties ease. Until there are clearer signs of inflation cooling, households may have to wait a little longer for relief.