Inflation surged to an eight-month high of 4.82% in August, putting the focus back on the case for a rate hike ahead of the Reserve Bank of India’s monetary policy next month.

Price pressures have not just stayed within food and transport but also travelled to areas such as household goods, clothing and education. 

Consumer price index (CPI)-based inflation rose from 4.45% in the previous month of July and remained above the RBI’s medium-term target of 4% for the third consecutive month. Incidentally, it reached the highest point under the new series, which began in January. 

While India’s central bank has left its benchmark policy rate unchanged at 5.25%, Asian peers such as Indonesia and the Philippines have tightened monetary policy in the wake of higher energy prices and currency volatility. 

However, minutes of the monetary policy ⁠meeting (MPC) last month showed that some members, including RBI Governor Sanjay Malhotra, favoured a rate hike if inflation spread across segments. The MPC, though, decided to adopt a ‘wait-and-watch policy’ before deciding to move to a rate-hike cycle.

Though maintaining that a rate hike is likely in December, Aditi Nayar, chief economist at rating agency ICRA, said it could advance to October if crude oil prices remain elevated in the run-up to the MPC meeting starting 5 October.

"Our base case is that a rate hike could materialise in the December 2026 meeting, particularly if there is evidence of a generalisation in inflationary pressures and crude oil prices sustain at elevated levels," she said.

The RBI last raised the benchmark repo rate in February 2023.

Pressure points in August inflation

The inflation uptick in August was broad-based and driven by 10 of the 12 divisions. But six divisions accounted for 37 basis points uptick compared with the previous month’s headline print, including food, electricity, gas & other fuels, housing, water and information & communications.

Food inflation remained an important pressure point, rising to 5.95% in August from 5.52% in July, according to data released by the National Statistical Office (NSO). Given the uneven monsoon showers, food prices could further harden and exert upward pressure on headline inflation.

Brent crude futures neared $108 a barrel, adding to inflation pressures as India imports nearly 85% of its oil needs. More than half of it come from the Middle East, a region impacted by the US-Iran war.

Transport inflation, related to fuel, rose to 4.60% in August from 4.43% in the previous July month. A sharp increase in inflation in the information and communication category could be partly due to strong global demand for memory chips led by the artificial intelligence boom.

For categories such as clothing, household goods and education, inflation ran close to or above 4%. Inflation in food-serving services rose to 8.41% from 7.75% in July.

“We expect the CPI inflation prints to cross the 5%-mark in September, and harden further to around 6% during October-November, the upper limit of the MPC's medium term target band,” said Nayar.

A rising inflationary trend is clearly visible. “India’s August retail inflation marks a third consecutive reading above the RBI’s 4% medium-term target. This shows that price pressures have become entrenched rather than a one-month aberration, making the RBI’s policy trade-off difficult,” said Manoranjan Sharma, chief economist at Infomerics Ratings.

Economists are divided on when the rate-hike cycle should begin. While some say a 25-basis-point hike could come in October, others believe it can happen in December after assessing the persistence of inflationary pressures.

"Given RBI's measures in withdrawing durable liquidity along with adverse global conditions, we continue to see scope for 50-75 basis points of rate hikes by the MPC, with the odds of an action in October increasing significantly," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.