The Reserve Bank of India (RBI) has failed to meet its price mandate, with the latest Consumer Price Index (CPI) inflation for September confirming a third straight quarter in which average inflation has stayed outside the tolerance band of 2-6 percent.
According to data released by the Ministry of Statistics and Programme Implementation on October 12, headline retail inflation rose to 7.41 percent in September from 7.00 percent in August.
At 7.41 percent, the September CPI inflation figure is slightly above the consensus estimate. As per a Moneycontrol poll, CPI inflation was seen rising to 7.3 percent.
Today's inflation print means inflation has now spent 36 consecutive months - or three full years - above the RBI's medium-term target of 4 percent. More importantly, inflation has been outside the mandated 2-6 percent tolerance range for three consecutive quarters, which is the definition of failure under the flexible inflation targeting framework.
CPI inflation averaged 6.3 percent in January-March, 7.3 percent in April-June, and now 7 percent in July-September.
As per the law, the RBI must now submit a report to the central government explaining why it failed, the remedial actions it proposes to take, and the time period within which inflation will return to target.
In the post-policy press conference on September 30, Governor Shaktikanta Das had said the Monetary Policy Committee (MPC) would meet to discuss the RBI's report to the government.
"So, what we will write, I will not say. But as I have said earlier, we are expecting the inflation to come down close to the target over a two-year cycle, that was our expectation earlier and even now," Das had added.
The RBI's most recent forecast sees CPI inflation averaging 6.7 percent in FY23 before dropping to 5.2 percent in FY24.
September internals
As expected, the rise in inflation in September was driven by higher food prices, with food inflation surging to 8.6 percent from 7.62 percent in August.
At 8.6 percent, the September food inflation figure is the highest in 22 months.
| SEP 2022 INFLATION | CHANGE IN INDEX, SEP 2022 VS AUG 2022 | |
| CPI | 7.41% | 0.6% |
| Food index | 8.6% | 0.9% |
| Cereals | 11.53% | 2.0% |
| Meat, fish | 2.55% | 1.3% |
| Oils, fats | 0.37% | -1.9% |
| Vegetables | 18.05% | 2.6% |
| Pulses | 3.05% | 1.1% |
| Clothing, footwear | 10.17% | 0.8% |
| Housing | 4.57% | 0.3% |
| Fuel, light | 10.39% | 0.4% |
| Miscellaneous | 6.06% | 0.4% |
Within food, vegetables again led the charge, with its index rising 2.6 percent month-on-month. Cereals and pulses too saw a strong rise, with their index increasing by 2.0 percent and 1.1 percent on a month-on-month basis, respectively.
"A lower acreage under rice this Kharif season, onset of festive season demand along with speculative trading, extension of PMGKY till December are together weighing on price of cereals," noted Yuvika Singhal, economist at QuantEco Research.
"In addition, intense unseasonal rains in early October, decline in acreage under pulses and pass-through of higher price of rice and wheat to their derivative products (flour, biscuits, rice puffs etc) have stacked risks on food inflation on the upside," Singhal added.
Core inflation, meanwhile, edged up to 6.1 percent from 5.9 percent in August, as per Moneycontrol's calculations.
Policy impact
The MPC is scheduled to next meet on December 5-7. However, going by Das' comment at the post-policy briefing on September 30, the committee will meet before that to finalise the RBI's failure report that must be sent to the government.
It remains unclear at the moment whether the report will be made public, although Das has said the central bank will not do so itself as it is "privileged communication".
Meanwhile, the minutes of the MPC's September 28-30 meeting will be released on October 14 and should shed some light on what the committee's members think about the path forward.
On September 30, the committee raised the repo rate by 50 basis points to 5.9 percent. This means it has increased the policy rate by a massive 190 basis points in the space of five months to tackle persistently high inflation. Economists are of the opinion that the central bank isn't done and will likely increase the repo rate again in early December, although the quantum of rate hike is up in the air.
"The quantum of the next rate hike will be determined by how much the inflation print recedes in October, as well as the strength of the GDP growth for July-September," ICRA's Chief Economist Aditi Nayar said.
Inflation data for October will be released on November 14, while GDP data for July-September will be published on November 30.
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