Why in the News
Retail inflation has stayed above the Reserve Bank of India (RBI)‘s legal target of 4%, set within a 2 to 6% band, for four straight months, reaching 5.54% in September. Ministry of Statistics and Programme Implementation (MoSPI) data show it up from 4.83% in August, mostly on food, days after the RBI’s first rate hike in over three and a half years.
What do headline and core inflation measure?
- Headline inflation: It measures the yearly rise in prices of the whole consumption basket, food and fuel included. If it exceeds a deposit’s interest rate, savers lose money.
- Core inflation: It leaves out food and fuel, whose prices swing sharply, to show underlying price pressure. It rose from 4.1% to 4.3%.
- Base effect: Inflation compares prices with those a year earlier. A low base last September inflates this year’s rate, an unfavourable base effect.
- Highest in the new series: The September figure is the highest in the new Consumer Price Index (CPI) series, begun in January 2026, and in almost two years on the old series.
- The takeaway: Rising core inflation means this is not just a food shock the next harvest will ease, so the RBI cannot wait it out.
What drove September’s rise?
- Food prices: Food inflation jumped from 5.97% to 7.74%, led by vegetables, fruits and sugar related items.
- Food’s share of the rise: Food and beverages caused 62 of the 71 basis point rise, by the rating agency ICRA’s estimate. A basis point is a hundredth of a percentage point.
- Cooking gas after the West Asia war: Inflation in ‘restaurants and cafes’ rose from 2.73% in February to 9.39% in September, because cooking gas and other inputs became costlier.
- Month on month momentum: Prices rose 0.7% over August overall and 1% for restaurants. Policymakers watch this monthly change because it shows current pressure without base effects.
Why is the RBI under pressure to act again?
- Generalisation of inflation: Inflation rose in 11 of the 12 major CPI categories. Economists call this spread across the basket “generalisation of inflation”.
- Rate hike made: Last week the RBI raised the repo rate, its lending rate to banks, by 25 basis points to 5.5%. Costlier loans are meant to cool spending.
- RBI’s own projections: The RBI expects CPI inflation to average 4.9% in July to September, matching the actual average, and 6% in October to December.
- October above the band: Economists expect inflation to cross 6%, the band’s upper limit, in October, with data due on 12 November.
- Case for another hike: The Bank of Baroda’s chief economist expects December to warrant another rate hike.
Challenges
- Costs not yet passed on: Makers of durables, fast moving consumer goods (FMCG) and automobiles have announced price rises that will show in the CPI in coming months.
- Kharif dependence: Earlier food stocks are depleted before the new season, so prices hinge on kharif crop arrivals.
- Supply shocks beyond rates: Cooking gas prices and a shortage of memory chips, which is making consumer electronics costlier, stem from global supply that a higher interest rate cannot fix.
Way Forward
- Supply side action: The Centre should use buffer stock releases and import duty cuts on scarce food items to cool prices.
- Data led rate decision: The Monetary Policy Committee (MPC) should weigh the October print before a further hike, because food driven inflation responds weakly to rates.
- Watch core and momentum: Track core inflation and month on month changes to judge whether rises are becoming entrenched.
Conclusion
One rate hike now has to contain price rises that have spread well beyond food. The next inflation print and the RBI’s following policy meeting will show whether it tightens again.
Key numbers
- Previous high, old CPI series: 6.21% (October 2024).
- RBI CPI projection, 2027: 5.7% for January to March and 5.6% for April to June.
Back2Basics: Flexible inflation targeting
- Origin: The Monetary Policy Framework Agreement (2015) made inflation targeting the RBI’s primary objective. A 2016 amendment to the Reserve Bank of India Act, 1934 made it statutory.
- Five yearly target: Section 45ZA requires the Centre, consulting the RBI, to set the target for five years at a time. The current period runs to March 2031.
- Monetary Policy Committee: A six member MPC sets the repo rate to meet the target.
- Accountability: If inflation stays outside the band for three consecutive quarters, the RBI must report the reasons and its remedial steps to the government.
Matching Previous Year Question
“[2022] In India, which one of the following is responsible for maintaining price stability by controlling inflation ? (a) Department of Consumer Affairs (b) Expenditure Management Commission (c) Financial Stability and Development Council (d) Reserve Bank of India (a) Department of Consumer Affairs (b) Expenditure Management Commission (c) Financial Stability and Development Council (d) Reserve Bank of India ANSWER: (d)”
