India’s retail inflation accelerated further in August, with headline CPI inflation rising to 4.82% y/y, up from 4.45% in July. Food inflation was even stronger, with the Consumer Food Price Index rising 5.95% from a year earlier. Rural inflation stood at 5.23%, while urban inflation was 4.31%.
The August reading puts headline inflation further above the Reserve Bank of India’s 4% medium-term target, although it remains comfortably within the central bank’s 2%-6% tolerance band. The bigger concern for the RBI is the composition of the increase. Food inflation has accelerated sharply, while the ongoing rise in oil prices creates an additional risk to headline inflation through fuel and transportation costs.
The data reinforces the expectations for a rate hike, with market pricing in a 72% chance of an increase at the next RBI meeting in October. As a reminder, the RBI kept the repo rate unchanged at 5.25% at the last meeting and retained its neutral stance. The central bank acknowledged that headline inflation was moving higher, but argued that the increase was mainly being driven by food and fuel, with limited evidence of broader inflationary pressure.
At the time, the RBI actually lowered its FY2026/27 inflation forecast to 5.0% from 5.1%, while cutting its core inflation forecast to 4.3% from 4.7%. It expected headline inflation to rise further in the near term, peak in Q3 and then moderate. The oil risk has become particularly relevant since the August meeting, though. Higher crude prices can raise India’s import bill, put pressure on the rupee and increase costs throughout the economy.
Governor Sanjay Malhotra also made clear that the RBI remains focused on headline inflation rather than core inflation. He described core inflation as a measure of underlying price pressures, but stressed that the central bank’s target is headline CPI. He also said the RBI would act based on the evolving growth-inflation outlook. At 4.82%, headline inflation is moving closer to the RBI’s 5% FY forecast.
This article was written by Giuseppe Dellamotta at investinglive.com.