India's retail inflation in September edged closer to the Reserve Bank of India’s target ceiling of 6% and became more broad-based, pushing the case for a further rate hike in the Reserve Bank of India’s December bi-monthly monetary policy.

The consumer price index-based inflation climbed to 5.54% in September from 4.83% in the preceding month, marking the fourth consecutive month where it has stayed above the RBI’s 4% medium-term target and its highest this year under the revised series.

Economists expect two 25-basis-point hikes in December and February. “We forecast a 25 bps rate hike in the December meeting, with the risk of one more,” said Pranjul Bhandari, chief India economist at HSBC.

The RBI last week raised its benchmark repo rate by 25 bps to 5.5% for the first time in nearly four years, after February 2023.

Food inflation jumped to 7.74% from 5.97% in August, but data also showed a more broad-based rising price trend. The weighted diffusion index indicates that c45% of the CPI basket is rising above 4% vs 37% in August. Non-food goods inflation rose to 5.8%, and services inflation, which had been keeping the headline low, has also started to pick up more meaningfully (c3% in 3Q vs c2% in 2Q).

The top five items with high inflation were onion (108.09), silver jewellery (87.8%), ginger (62.85%), garlic (54.62%) and lemon (36.41%).

The inflation risks come from crude oil prices at above $100 a barrel amid the US-Iran war, a deficient monsoon, El Nino conditions and a weak rupee which has depreciated 7% against the dollar this year.

The CPI-based inflation is set to cross 6% in October. “While the monsoon has turned out to be fairly dismal, with inadequate replenishment of reservoirs clouding the outlook for rabi sowing, another rate hike in December seems quite certain. Crude oil prices currently remain elevated, and their trajectory will keenly influence the likelihood and extent of further rate tightening in 2027,” said Aditi Nayar, chief economist at ICRA.