India's CPI May Rise To 6.3% In October As Food Inflation Soars: Citi Research

India's consumer price index-based inflation may breach the upper limit of 6% of the Reserve Bank of India's target band in October due to a sharp rise in food prices, according to Citi Research. This rules out the possibility of a rate cut by the RBI in December, Citi said in a note.

The New York-headquartered investment bank forecast CPI to accelerate to 6.3% in October on an annualised basis from 5.49% seen in the previous month as food and beverage inflation hits double-digit growth in the month due to the above average increase in vegetable prices and elevated edible prices.

In September, India's headline retail inflation rose to 5.49%, a nine–month high, due to the base effect and vegetable prices soaring 35.99% on the year.

In case the October CPI print comes close to or is the same as Citi Research's forecast, this is likely to be followed by 60–80 basis points of upside risk to the Reserve Bank of India's third quarter and and 20–30 basis point rise in full-year forecast. The central bank forecasted 4.8% headline inflation for the December quarter and 4.5% for the financial year 2025, the New York-headquartered investment bank said.

India will release its latest CPI numbers for October on Nov. 12.

This will also alter the balance of risk between growth and inflation in the Monetary Policy Committee statement, Citi Research said.

Citi Research will also watch if the RBI revises the growth estimates downward for the current financial year. Higher concerns for growth justifies the investment banker's view of a rate cut probability in February. The rate-cut cycle may also be a shallow one.

The RBI MPC is scheduled to meet for the two-day bimonthly meeting from December 4 to 6.

Citi Research estimates vegetable prices will likely rise to 8% on a sequential basis in October, tracking a spike in prices of tomato and green vegetables. Retail prices of tomatoes have risen 39% in October, according to data by the Department of Consumer Affairs, the brokerage said.

Onion prices may increase beyond the trend because it has already risen sharply in September.

New crop arrivals for tomatoes and onions remained lower in early October, according to Citi Research. However, most of the new crops arrive during the winter months, which will lead to a decline in vegetable prices in the near term.

"For now we have built-in 23-24% fall in vegetable prices during winter months," Citi Research said.

Apart from vegetables, edible oil and fats are key components in the CPI food category. According to DCA data, there is an 8–9% rise in edible oil prices. The increase was because of an uptick in palm oil prices in international markets and import duty on edible oils, Citi Research said.