India’s Retail Inflation Rises In Oct. Led By Higher Vegetable Prices

Retail inflation in India picked up in Oct. led largely by higher vegetable and fuel prices, lowering hopes of a rate cut ahead of the Reserve Bank of India's monetary policy review next month.

Consumer prices in October rose 3.58 percent over the same month last year, according to data from the Central Statistics Office. CPI Inflation in Sept. and August stood at 3.28 percent. Economists polled by Bloomberg had expected inflation slightly lower at 3.43 percent.

Higher inflation was driven by vegetable prices which rose 7.5 percent over last year. Onion prices in India have been on the rise due to tight supplies. The surge was likely driven by a drop in kharif onion crop sowing because of unseasonal rains. Forty percent of India’s onion produce is in the kharif season, however, that cannot be stored as it needs relatively low humidity.

Last week, the government allowed state-owned agencies to import onions to boost domestic supply and check price rise. Tomato prices, while lower than September, firmed up due to supply disruption in Karnataka, one of the leading producers.

The elevated prices are expected to normalise over the next few months as fresh supplies hit the market, Abhishek Gupta, economist at Bloomberg Intelligence wrote in an earlier note.

Also Read: Rising Oil Portends Long Pause as India Prepares for Rate Review

To Cut Or Not?

This is the final inflation print that the RBI will have before its monetary policy review in December.

There is not “enough comfort to the central bank for it to cut rates” in December, said Morgan Stanley in a recent note, as it estimated Oct. inflation at 3.2 percent. “The recent rise in oil prices, coupled with signs that the economy is gathering momentum, will be additional reasons against further monetary easing,” the note added.

The RBI, in its previous review, highlighted upside risks to inflation with Governor Urjit Patel calling for a “cautious approach”. The MPC was divided on holding rates in August, with the lone dissenting member Ravindra Dholakia wanting a steep 50 basis point cut. Another member Michael Patra, had advocated a rate hike saying the central bank needs to be ready to raise rates if the drivers of inflation strengthened further.

The RBI had raised its inflation forecast while cutting growth projection for fiscal 2018 due the lingering effects of demonetisation, the rollout of GST and the spurt in crude oil prices around the globe.

Oil Price Concerns

A recovery in the global oil prices primarily due to the production cuts triggered by exporting countries to reduce oversupply is also expected to impact inflation. Brent crude rebound 41 percent from the year's low in June to trade above $60 per barrel. Fuel inflation in India is expected to increase 120 basis points for the remaining fiscal 2018 owing to higher crude prices, according to Soumya Kanti Ghosh, chief economic adviser at the State Bank of India.

Petrol and diesel have a combined weight of 2.3 percent in the consumer price inflation basket. A 10 percent rise in crude oil prices could increase the CPI inflation by around 25 basis points, if the government chose to pass on the full hike to consumers, wrote Tanvee Gupta Jain, economist at UBS Global Research, in a prior note.

Moreover, rising oil prices also have an indirect impact through higher production and transportation costs which may exert upward pressure on food inflation, according to Japanese brokerage Nomura.

The RBI will also factor in economic growth data for the July-September period which is due on November 30.

Key Highlights

• Consumer food prices went up 1.9 percent over last year compared to a 1.25 percent rise in September.
• Prices of pulses and products fell 23.1 percent year-on-year. Prices continued to soften after having declined 22.5 percent in September, and 24 percent in August and July.
• Fuel and light inflation stood at 6.36 percent, compared to 5.56 percent in September
• Housing inflation stood at 6.7 percent compared to 6.1 percent in September
• Prices of clothing and footwear went up 4.76 percent compared to 4.63 percent in September