October retail inflation touches 16-month high of 4.62% on high vegetable prices

Retail inflation touched a 16-month high of 4.62 per cent in October due to higher food prices, showed data released by National Statistics Office. Notably, this is the first month since August 2018 that retail inflation has breached the 4 per cent medium-term target set by the Reserve Bank of India. Meanwhile, inflation in food basked rose to 7.89 per cent in October.

Retail inflation, calculated on the basis of Consumer Price Index (CPI), skyrocketed on the back of high vegetable prices. Last month saw exorbitant onion and tomato prices due to unseasonal rains, disruption in supply chain and acquisition restrictions on traders.

Vegetables saw the highest inflation rate of 26.10 per cent in October, followed by pulses and products at 11.72 per cent. Meat and fish showed an inflation rate of 9.75 per cent, whereas eggs got costlier by 6.26 per cent. Remaining items in the food basket reported inflation rates in the range of 1.33 per cent o 4.08 per cent.

Fuel and light became cheaper in October as inflation in the segment declined by 2 per cent. Transport and communication also became marginally cheaper, posting a deflation rate of 0.47 per cent.

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The Reserve Bank of India (RBI) mainly factors in the retail inflation while deciding the bi-monthly monetary policy. The central bank has reduced policy rates five times in a row by 135 basis points to 5.15 per cent. Higher inflation rate might keep the RBI from going ahead with another policy rate cut in its next monetary policy meeting scheduled on December 5.

Industrial output in September fell by 4.3 per cent due to poor show across all sectors, data released earlier this month showed. The indices of industrial production for the mining, manufacturing and electricity sectors showed de-growth of 8.5 per cent, 3.9 per cent and 2.6 per cent, respectively in the month of September 2019.

"October CPI has increased to 4.62 per cent from 3.99 per cent in September and has surprisingly came in more than what the market was expecting. This sharp rise was especially due to uptick in food prices amid erratic monsoon. Despite rising inflation, we expect RBI to continue its easing cycle on the back of sluggish growth and weak core inflation and cut repo rate at December meeting," said Rahul Gupta, Head of Currency, Emkay Global Financial Services

"The inflation print has surprised on the upside on account of vegetable inflation in October. For the RBI, it however presents a tough policy dilemma of overshooting inflation, undershooting growth and fragile fiscal state. However, we think the current underlying growth-inflation mix continues to be favourable for counter-cyclical monetary stance. We think the monetary accommodation has further steam of 50-65bps cut more in the cycle, contingent on data outcomes," said Madhavi Arora, Economist, Forex & Rates, Edelweiss Securities.

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