India's inflation rises to 5.54%, bolstering case for more rate hikes

what happened

India’s retail inflation accelerated to 5.54% in September from 4.83% in August, Reuters reported, slightly exceeding the 5.4% forecast in a Reuters poll. The reading moved close to the Reserve Bank of India’s 2%-6% tolerance band and stayed above its 4% medium-term target for a fourth straight month. It was also the highest level this year under the current series.

Price pressures are being amplified by the Iran war and a weak monsoon. Food inflation climbed to 7.74% from 5.97% in August, driven by more expensive onions, ginger and garlic, while transport inflation increased to 5.01% from 4.6%. September’s figure was also lifted partly by base effects, as lower prices a year earlier make this year’s inflation rate appear higher.

The RBI raised its benchmark repo rate by 25 basis points to 5.5% last week, its first increase in nearly four years, citing elevated inflation expectations and broader price pressures. The central bank last raised rates in February 2023. Governor Sanjay Malhotra said headline CPI inflation could average nearly 5.8% over the next three quarters, and the RBI lifted its fiscal 2027 forecast to 5.2% from 5%.

why it matters

The data keep the RBI’s rate path and Indian government bonds in focus. The central bank warned that a weak monsoon and strong El Nino conditions could hurt agriculture and rural demand, although ample foodgrain stocks and government measures may cushion the effect. Brent crude futures have remained above $100 a barrel.

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