Inflation goes from benign to hostile | Hindustan Times
October’s Consumer Price Index (CPI)-based inflation print came in at 6.1%, in line with market expectations. India’s inflation targeting framework mandates RBI to maintain inflation at 4% with a band of 2%. RBI is believed to have failed in its inflation targeting mandate when inflation stays outside the target band for three consecutive quarters.
While RBI’s mandate does not acknowledge anything beyond inflation targeting for setting its policy rate, factors such as yet another rate hike by the US Federal Reserve will add to the case for raising rates in India as well. (HT Archive)Monthly inflation crossed the 4% mark in June 2026. It is now above 6%. RBI’s latest Monetary Policy Committee (MPC) resolution from October believed that inflation would peak at 6% in the quarter ending December 2026 and fall to 5.7% and 5.6% in the quarters ending March 2027 and June 2027. Analysts, however, believe the story could be different from RBI’s October assessment.
A research note by JP Morgan believes inflation could stay above the 6% mark until June 2027. To be sure, everybody agrees that future inflation trajectory will be determined by factors generating both headwinds and tailwinds. Lower chances of a military escalation in the ongoing West Asia war have eased crude oil prices and might provide a reprieve. However, factors such as a strengthening El Niño do not bode well for food prices going forward. Food inflation is now percolating to categories such as cereals and pulses, which, unlike vegetables, have more sticky prices. Another important point from the JP Morgan note is the relation between strong corporate results being likely evidence that businesses have passed their higher input prices to consumers. Core inflation — the non-food, non-fuel component of the CPI basket — has also seen an increase in the recent inflationary revival, which suggests that price pressures are becoming broad-based. Wholesale inflation — the October print will be released on Monday — has been growing at double-digit or close-to-double-digit levels for the past few months.
All of these factors will add to the already hawkish pivot in monetary policy in October. There is near unanimity among economists that RBI will hike policy rates by as much as half a percentage point over and above the 25-basis points — a basis point is hundredth of a percentage point — increase already made. This is bound to raise borrowing and mortgage costs and put pressure on aggregate demand, thereby generating headwinds for economic growth. To be sure, there is no immediate crisis on the growth front — RBI expects 2026-27 growth to be 7.1% — and a monetary tightening will be well advised to anchor both inflation and inflation expectations. While RBI’s mandate does not acknowledge anything beyond inflation targeting for setting its policy rate, factors such as yet another rate hike by the US Federal Reserve will add to the case for raising rates in India as well.
Is there anything else worth saying about the latest inflation numbers, beyond the monetary policy dynamic? Two more points could be made. If inflation really stays above the 6% benchmark until the June quarter, one can expect a higher nominal GDP growth rate for the fiscal year. This should generate some much-needed cushion on the fiscal front as revenues are a fraction of nominal GDP. Last but not the least, while there is no immediate crisis on the food supply or inflation front, policymakers will do well to carefully watch the developing dynamics in the food-feed-fuel economy with crops usually designated for food and feed use being diverted for producing biofuel. If they end up triggering a sharp spike in food inflation, the assumed cost-benefit calculations ought to be revisited.
