India’s Retail Inflation Sees Notable Drop in September, Yet Challenges Remain

India's Retail Inflation Sees Notable Drop in September, Yet Challenges Remain
India's Retail Inflation Sees Notable Drop in September, Yet Challenges Remain

India’s retail inflation experienced a remarkable downturn in September, marking a substantial departure from the elevated levels observed just 15 months earlier. The drop in inflation, driven largely by the softening of vegetable prices, led to the Consumer Price Index (CPI) hitting a three-month low. However, despite this positive change, inflation still hovers above the central bank’s 4% target, raising concerns about potential rate adjustments.

The role of softening vegetable prices in the inflation decline was pivotal. In contrast, in August and the preceding months, soaring vegetable prices had been a driving force behind inflation. The government had even implemented measures such as banning rice exports and increasing duties on onions in response to the price hikes.

Food inflation, a significant component of the consumer price basket, also experienced a decline. In September, food inflation stood at 6.56%, a drop from the 9.94% recorded in August.

Inflation in cereals and edible oils also moderated in September, contributing to the overall decrease in inflation. Cereal inflation, which had been at 11.85% in August, eased to 10.95% in September. The government’s interventions, such as the export ban on rice and adjustments to essential commodities’ duties, clearly influenced this outcome.

Nonetheless, certain components continued to witness price increases, including cereals, which saw an 11% price hike, pulses with a 16% increase, and a 23% rise in spice prices.

Economists have offered insights into this scenario. Anitha Rangan, an economist at Equirus, highlighted key factors contributing to the reduction in inflation. She pointed out that the decline was driven by factors such as government actions on LPG prices, which impacted fuel and light expenses, as well as the substantial drop in vegetable prices. Edible oil prices also played a role in the inflation’s descent, but cereals, pulses, and spices continued to see price increases.

The outlook for food inflation appears challenging due to factors like an uneven monsoon and reports from several states indicating the possibility of a sub-par kharif crop. Achieving the 4% inflation target remains a daunting task in the near future, despite the rate having now dropped to 5%.

However, even with this substantial reduction in inflation, the Reserve Bank of India (RBI) has made it clear that simply achieving an inflation rate below 6% may not be adequate to warrant a reduction in lending rates. In its fourth consecutive policy meeting in September, the central bank opted to maintain its key lending rate unchanged.