Inflation May Have Risen On High Food Prices, Hurting Economy Further

According to a recent Reuters poll of economists, India's retail inflation may have breached RBI's (Reserve Bank of India) medium-term target of 4 percent in October for the first time in 15 months, mainly due to an increase in vegetable prices. The poll of 39 economists, conducted between 4 to 7 November estimated consumer price inflation at 4.25 percent in October, the highest since June 2018.

In another survey of 33 economists by Bloomberg forecasted the country's CPI (consumer price index) for the last month at 4.3 percent.

The month's CPI is scheduled to be released by the government on Wednesday evening. In September, it stood at 3.9 percent.

Food prices form the biggest share in the consumer price basket.

In October, prices of most vegetables rose as higher than normal rainfall this monsoon, delayed harvest and even destroyed crops. Onion prices saw a major surge, wherein rates crossed Rs 100 per kilo in many prominent Indian cities, contributing to the rise in food prices.

However, while a rise in inflation generally means an increase in demand (which is a good sign for growth in the economy), causing the central bank to put a halt on its rate cuts, it may not be the case this time. The surge has been due to subdued harvest from destructive rainfall and even hoarding of production by some onion traders (as per news reports).

Due to these factors, the RBI may not feel compelled enough to pause interest rate cuts at its next monetary policy meet scheduled for December. Indicators like PMI (Purchasing Managers Index), which showed weak manufacturing and service activity in October and the IIP's (Index of Industrial Production) contraction to 4.3 percent for the month of September has added to the existing concerns of decline in GDP growth for the second quarter of 2019-20.

On Tuesday, an SBI report said that GDP (gross domestic product) for Q2 may be at 4.2 percent, lower than the 6-year low of 5 percent growth seen in Q1.

While the government took steps to curb increase in onion prices, like putting a ban on onion exports and IT raids on large onion traders, the effects are yet to be seen.