India's Temporary Inflation Dip Keeps RBI Alert

India witnessed a gradual decline in inflation for the third consecutive month in October. However, this relief might be short-lived for policymakers concerned about escalating food expenses ahead of elections.

According to data from the statistics ministry, the consumer price index increased by 4.87 per cent compared to the previous year, a slight drop from September's 5.02 per cent but marginally higher than economists' projections.

The decrease in inflation was primarily due to a slowdown in core inflation, stemming from reduced prices in clothing, household goods and healthcare. Despite this, food prices, a significant portion of the consumer basket, remained elevated, creating continued concern.

Reserve Bank of India Governor Shaktikanta Das highlighted the risk of food price shocks, indicating a necessity for ongoing vigilance among policymakers.

"We anticipate a vigilant stance from the Monetary Policy Committee," mentioned Aditi Nayar, ICRA's chief economist, forecasting an inflation increase to 5.6 per cent by December and a sustained range of 4.9 per cent to 5.6 per cent over the following two quarters.

The Reserve Bank of India has maintained interest rates unchanged for four consecutive meetings, upholding a relatively vigilant policy approach to manage inflation within the targeted 4 per cent threshold.

A media report suggests that the RBI will likely hold its hawkish stance until the Federal Reserve initiates rate cuts. This anticipation has kept bonds trading within a narrow range.

While the recent inflation moderation provides some relief, analysts expect sub-5 per cent headline inflation to be temporary. Upasna Bhardwaj, an economist at Kotak Mahindra Bank, predicts a prolonged rate hold by the RBI, with liquidity tools used to mitigate risks.

Notably, food prices continued their ascent, with a 6.61 per cent rise in October, similar to September. Other sectors like clothing, housing and fuel exhibited varying price movements.

Managing food prices and inflation stands as a crucial focus for Prime Minister Narendra Modi's government amidst the upcoming elections. Recent efforts, such as curbing rice and sugar exports, aimed to tackle escalating food expenses.

The rupee's depreciation adds complexity, with recent declines against the dollar potentially influencing imported inflation. The RBI's interventions in the spot rupee market are perceived as measures to prevent this impact.