India’s Slowing Inflation Gives RBI More Breathing Room

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(Bloomberg) — India’s inflation slowed for a third straight month in October, providing some reprieve to policymakers as concerns over vegetable and oil prices continue to mount. 

The consumer price index rose 4.87% from a year earlier, statistics ministry data showed Monday, down from 5.02% in September and higher than the 4.8% estimated by economists. 

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The Reserve Bank of India has kept interest rates unchanged for four straight meetings now, although it’s stuck with a relatively hawkish policy stance to keep price pressures in check. Governor Shaktikanta Das said last week India remains vulnerable to food prices shocks, suggesting policymakers will remain vigilant about the outlook, especially with the rupee at a record low. 

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With the latest reading, inflation has inched closer to the central bank’s target. The RBI targets the midpoint of a 2%-6% inflation band, and is focusing on achieving that goal on a sustained basis. Bonds have traded in a relatively tight range in the past month as traders expect a long hold in the key policy rate.

“The moderation provides some relief but we expect the trend of sub-5% headline inflation to remain brief,” said Upasna Bhardwaj, an economist with Kotak Mahindra Bank. She sees the central bank remaining “on an extended pause phase in rates with liquidity being used as a more frequent tool to manage the stance.”

Food prices, which make up about half of the inflation basket, rose 6.61% in October from a year earlier, a tad lower than 6.62% in September. Clothing and footwear costs rose 4.31%, while housing prices accelerated 3.8%. Fuel and electricity costs fell 0.39%.

Core inflation, which strips out volatile food and energy prices, moderated to 4.25%.

Keeping food prices and inflation in check is a key priority for Prime Minister Narendra Modi and his government as election season hots up. Five states are voting in November, followed by a national election in 2024, in which Modi is seeking to win a third term in office. 

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The government has taken several steps in recent months to curb rising food costs, such as restricting exports of rice and sugar. The average price of onions, a key ingredient in Indian food, jumped more than 60% last month, government data showed, prompting authorities to take action to bring down costs. 

As the world’s third-biggest consumer of oil, India is particularly vulnerable to higher crude prices as well. While oil prices have slid recently, tensions in the Middle East continue to cloud the outlook.

The currency’s recent depreciation is another complicating factor. The rupee is down more than 1.5% against the dollar since July and hit a record low recently as the US currency strengthened. Market participants read intervention by the RBI in the spot rupee market as a way to prevent imported inflation from hitting India’s economy.

“There has to be caution because food prices are inherently unpredictable and volatile in nature, but it doesn’t look like we will cross the 6% threshold which is the upper end of the RBI’s tolerance band,” said Vivek Kumar, economist at QuantEco Research. “The bond market will look at core number which gives you comfort.”

—With assistance from Ronojoy Mazumdar.

(Updates with economist comment in fifth paragraph and chart)

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