India’s inflation story is becoming more complicated for the Reserve Bank of India.
Headline consumer inflation accelerated to 4.82% in August, from 4.45% in July, marking the third consecutive month above the RBI’s 4% medium-term target.
As with the United States and elsewhere around the world, rising inflation is no longer just a story of food and fuel.
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We continue to expect inflation to remain elevated over the next two to three months, with CPI averaging around 5% through 2026-27. The August data, however, increases the upside risks to that outlook.
That’s because pricing pressures are beginning to spread into a wider range of goods and services beyond food and fuel, raising the risk that what began as a supply shock could become more persistent.
Food remains the largest source of pressure, reflecting the effects of weak and uneven monsoon conditions on agricultural supply. Transport costs also continued to rise as higher global energy prices worked through the domestic economy.
But inflation also accelerated in categories such as personal care, restaurants and accommodation services, clothing and footwear, among other categories.
The RBI now faces a more difficult policy trade-off than it did a month ago. Headline inflation remains within the central bank’s broader tolerance band, and much of the current pressure is still supply-driven.
But the combination of persistent food inflation, higher energy costs and broader price increases means the central bank can no longer assume that the shock will remain narrowly contained.
We therefore see a greater probability of a policy rate increase at the October meeting than we did following the July inflation report.
The takeaway
Our base case remains that the RBI delivers at least one 25-basis-point rate hike later this fiscal year, most plausibly at the December or February policy review.
The October meeting, however, has become a much closer call. If Brent crude shows little sign of easing ahead of the October meeting, the RBI may choose to tighten as early as October.
