(Sept 14): India’s inflation accelerated in August, moving closer to the top of the central bank’s 2%-6% target range and potentially narrowing the scope for policymakers to remain on hold for long.

The consumer price index rose 4.82% last month from a year earlier, up from 4.45% in July, data released Monday by the Ministry of Statistics and Programme Implementation showed. That was in line with the 4.86% median estimate in a Bloomberg survey of economists. The reading was the highest since December 2024 and marked the third straight month that headline inflation exceeded the Reserve Bank of India’s 4% medium-term target. 

The acceleration was driven by firmer food prices, while restaurant and transport costs also kept broader price pressures firm. 

The data showed that “price pressures have become more persistent rather than a one-month aberration, making the RBI’s policy trade-off difficult”, said Manoranjan Sharma, economist with Infomerics Ratings.

Still, the RBI has signalled it won’t react mechanically to a higher number. Governor Sanjay Malhotra said in an interview Friday that underlying price pressures remain low and policymakers will focus on whether the increase persists and spreads more broadly through the economy.

The RBI has kept its benchmark rate unchanged at 5.25% since the start of the year, one of the few major central banks to remain in wait-and-watch mode despite the economic shocks from the Middle East war. Of late, however, some policymakers have become more alert to inflation risks as oil surges past US$108 a barrel and food prices remain elevated.

The monetary policy committee next meets in October, with some economists seeing a real risk of the first rate hike since the Middle East war began. Today’s figures could help further shape those expectations.

The RBI’s prolonged pause situation “has changed drastically”, Soumya Kanti Ghosh, an economist at the State Bank of India, wrote in a note Friday, predicting inflation may head toward 6.5% or higher if oil prices remain high. 

“Now, we strongly advocate a 25-basis-point rate hike in the upcoming October policy, followed by another in December in quick succession.” 

After the numbers, the odds of “an action in October” have increased significantly, said Upasna Bhardwaj, economist at Kotak Mahindra Bank Ltd, adding there’s scope for 50 to 75 basis points of cumulative rate hikes by the central bank. 

The RBI’s challenge is to keep inflation in check without unnecessarily weakening an economy that has so far weathered the Middle East conflict relatively well. Stronger-than-expected growth of 7.8% in the April-June quarter gives policymakers some room to raise rates if price pressures continue to build.

Food inflation, which accounts for more than a third of the CPI basket, climbed 5.95% from 5.52% a month earlier. Core inflation, which strips volatile food and fuel prices, climbed to 4.2% in August, up from 3.9% in July, as per calculations by Bloomberg Economics. 

The data also showed:

A looming threat is that deficient monsoon rains across parts of India could hurt crop yields and supplies, further fanning inflation. Festive-season spending through November could also add to price pressures, economists say.

A sustained rise in global crude prices poses another inflation risk for India, which imports nearly 90% of its oil. A prolonged spell above US$100 a barrel could increase pressure to raise retail petrol and diesel prices, feeding directly into inflation and lifting transport and other input costs.

Inflation may climb further as high crude prices combine with strengthening domestic demand. “Demand conditions may add to the momentum going forward, given low real rates, strong credit growth and an unprecedented build-up of surplus liquidity,” said Gaurav Kapur, economist at IndusInd Bank Ltd.

Higher oil prices could also weigh on the rupee by increasing India’s import bill, making overseas goods more expensive. The currency could face another test from the US Federal Reserve’s Sept 15-16 meeting if policymakers there raise rates or signal further tightening. Malhotra, however, played down the influence of Fed decisions on Indian monetary policy in Friday’s interview.

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