India’s retail inflation rises to 5-month high of 7.41%, industrial activity contracts

Driven by rising food prices, India's retail inflation accelerated to 7.41% in September, the fastest pace in five months, data released by the National Statistical Office (NSO) showed on Wednesday. The number stayed well above the Reserve Bank of India's (RBI) upper tolerance band for the ninth straight month. This is likely to pressure the RBI, which has raised its key repo rate by 190 basis points in four moves this year, to intensify its interest rates hikes.

Food inflation, which accounts for nearly half the CPI basket, soared 8.60% in September 2022 as against 7.62% in August.

Meanwhile, industrial growth, as measured by the Index of Industrial Production (IIP), contracted 0.8% in August as compared to 2.4% in July, according to the data released by the National Statistical Office (NSO).

The mining output contracted 3.9%, while power generation increased 1.4% during August.

In April 2020, industrial production had contracted 57.3% due to a decline in economic activities in the wake of the lockdown imposed to curb the spread of coronavirus infections.

Over 10% depreciation of India's rupee against the dollar this year has made imports costlier for consumers and businesses.

Fuel and electricity prices rose 11.44% year-on-year last month, compared with a 10.78% rise the previous month, data showed.

Core inflation, excluding volatile food and energy prices, was estimated at 6.07%-6.1% in September, compared with 5.84%-5.90% estimates in August, said three economists after the data release.

Another rate hike is certain

“Another rate hike is certain in the December 2022 MPC review, after the uncomfortable inflation print of 7.4% for September 2022. The quantum of the next rate hike will be determined by how much the inflation print recedes in October 2022, as well as the strength of the GDP growth for Q2 FY23,” Aditi Nayar, Chief Economist, ICRA, said.

The ICRA Chief Economist added, "The excessive rainfall in early October 2022 may adversely impact the kharif harvest and delay rabi sowing, thereby posing a material upside risk to the food inflation outlook. However, the impact of the same on the y-o-y food inflation prints is likely to be partly mollified by the high base that lies ahead for H2 FY23."

"We expect the RBI to hike repo rate by 35-50 bps in December, with the next move being more data dependent," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, Mumbai.

Axis Bank Mumbai Chief Economist Saugata Bhattacharya believes that this will require continued monetary policy tightening, but the magnitude will depend on balancing growth and exchange rate considerations.