Retail inflation nudges up to 3.77 percent

India’s retail inflation rose marginally in September, nudged up by food and fuel prices, but short of the Reserve Bank of India’s 4 percent medium-term target, strengthening views it could tighten monetary policy in December following unchanged rates last week.

Background

India has seen both high and low inflation since 1953. It was highest at 25.2% in 1974 and in 2011 again rose to 12.6 percent.

Analysis

Food inflation rose to 0.51 percent from a year earlier, against 0.29 percent in August. Urban CPI has already touched 4.31 percent.

Core inflation, which excludes volatile food and fuel sectors, was seen at 5.8 percent, down from around 6 percent in August, according to analysts. 

The RBI has projected inflation of 4.8 percent by June 2019, slightly lower than its August forecast of 5.0 percent. 

It has raised its policy rate 50 basis points since June and is widely expected to raise rates by at least 25 basis points more this year. 

Assessment

Our assessment is that the weakness in the rupee and the higher price of oil could push inflation (CPI) up to 5 percent. A 10 percent fall in the rupee typically adds 30-40 basis points to headline CPI, ceteris paribus over 12 months.