RBI Highlights Core Inflation and Food Price Spillovers as Key Concerns in November Bulletin

Apart from the sharp surge in food prices, which led to a spike in India's CPI October reading, core inflation edging up is emerging as a new worry for the Reserve Bank of India, according to its November bulletin.

The RBI is concerned about spillovers of high primary food prices; following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick, the RBI paper titled State of the Economy said.

The pick-up in price rises of household services like those of domestic helps or cooks also reflects higher cost of living pressures due to elevated food prices beginning to transmit to these specific wages, RBI's bulletin for November said and does not necessarily reflect the views of the central bank.

"Inflation is already biting into urban consumption demand and corporates' earnings and capex. If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports," the bulletin said.

The October CPI inflation reading turned out to be a sticker shock after the wake-up call of September’s spike, reinforcing the RBI’s warnings on complacency due to sub-target outcomes for July and August, it said.

The CPI inflation rose to 6.21% last month, compared to 5.49% in September, and exceeded expectations of 5.9% polled by Bloomberg.

The RBI targets retail inflation at 4%, with a tolerance level of two percentage points on either side.

Last month, the jump in retail inflation was led by vegetables, with prices soaring 42.18% on-year compared to 35.99% in September.

Core inflation, which excludes volatile food and fuel, rose to a 10-month high of 3.7% in October compared to 3.5% in September.

Overall, the Indian economy is exhibiting resilience, underpinned by festival-related consumption and a recovering agriculture sector.

"In India, the slack in speed observed in the second quarter of 2024-25 is behind us as private consumption is back to being the driver of domestic demand with festival spending lighting up real activity in Q3," the RBI paper said.

While domestic financial markets are seeing corrections with relentless hardening of the US dollar and equities being under pressure, the overall medium-term outlook remains bullish because of the innate strength of macro fundamentals.

The record production estimates for kharif foodgrains, as well as promising rabi crop prospects, also augur well for farm income and rural demand going forward.

On global growth, it is expected to sustain its momentum in the near term as a fall in inflation and easing of financial conditions across major economies boosts consumer spending.

While a fall in inflation in advanced economies has led to easing of monetary policy conditions, emerging market economy central banks face challenges from external headwinds, leading to differences in policy responses, it said.

"Despite a significant fall in inflation, consumer confidence in most economies is yet to recover, which could act as a drag going forward," it said.

Further, concerns over high debt levels remain significant, pushing up yields in recent months, it added.