NEW DELHI : India’s retail inflation sharply accelerated in September to a 14-month high at 3.99%, almost touching the central bank’s medium-term target of 4%, as food inflation nearly doubled to 5.1%. The high retail inflation could limit the Reserve Bank of India’s (RBI’s) ability to further cut policy rates.

Data separately released by the industry department on Monday, however, showed that wholesale price inflation decelerated to a three-year low at 0.33% in September compared with 1.08% a month ago, as prices of manufactured items entered the deflationary territory, signalling the lack of pricing power of producers in the current economic downturn.

Inflation for manufactured items stood at -0.42% in September as against 0% a month ago. The WPI inflation rate declined in September despite onion prices rising 122% from a year ago. The government has banned exports of onions and put stock limits on traders to cool prices.

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

The spike in retail inflation is a blip and should correct going ahead, said Crisil Ltd’s chief economist Dharmakirti Joshi. “Overall, food inflation could remain high this year even as core inflation declines. That should improve terms of trade for the farmers," he said. The non-food, non-fuel core inflation eased to a 26-month low at 4.2% in September.

However, many economists said the rise in retail inflation may impact the rate cut cycle of RBI. The decline in core inflation provides some comfort, but the unexpectedly sharp jump in the September CPI inflation has pushed up the likelihood of a pause in the next MPC review, unless the headline retail inflation recedes sharply in this month, said Aditi Nayar, principal economist at Icra Ltd.

The question is whether food prices will continue to rise as onions and tomatoes continue to cause concern, said Madan Sabnavis, chief economist at Care Ratings. “Monetary policy has to be cautious and while it had decidedly targeted growth in the earlier policies, it has to consider CPI inflation over which rates have no control..." he said.