India inflation hits 22-month high as energy costs drive price pressures

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India inflation hits 22-month high

Highlights

India inflation reaches 5.54%, a 22-month high.
Energy costs and drought increase price risks.
HSBC expects another RBI rate hike in December.

Consumer prices rose 5.54% from a year earlier, compared with 4.82% in August, CNBC reports. The reading exceeded the 5.40% forecast in a survey of economists and marked the eleventh consecutive month of accelerating inflation.

Rising prices strengthen the case for tighter policy

The September figures follow the RBI's first interest-rate increase since 2023, announced earlier this month. Policymakers have indicated that further cuts are unlikely in the near term, leaving another increase or an extended pause as the main options.

Inflation now stands well above the central bank's 4% medium-term target. The RBI expects headline inflation to average 5.2% in the financial year ending March 2027, while projecting core inflation of 4.4%.

HSBC economists anticipate another rate increase in December, according to an October 7 report. Their forecast suggests that monetary tightening could continue even if the central bank avoids a prolonged series of increases.

The challenge for policymakers is that much of the current price pressure originates outside domestic demand. Higher borrowing costs may restrain spending, but they cannot directly resolve shortages of imported energy or agricultural supplies.

Energy imports and drought add to inflation risks

India imports nearly 85% of its fuel requirements, leaving the economy particularly exposed to disruptions caused by the war involving Iran. Before the conflict, a substantial share of its energy supplies moved through the Strait of Hormuz.

Elevated oil prices have increased pressure on import costs, while continuing Middle East tensions and Hurricane Isaias have contributed to uncertainty in energy markets. Persistent fuel costs can also affect transportation, manufacturing, and household expenses.

Food supplies face a separate threat from unusually weak monsoon rainfall associated with a strong El Niño. India recorded its lowest June-to-September rainfall in more than a decade, with drought affecting agricultural areas in Maharashtra, Andhra Pradesh, Punjab, and Haryana.

The India Meteorological Department ranked the season as the fourth driest since 2001 and the thirteenth driest since 1901. Reduced rainfall threatens crop production and reservoir levels, potentially extending food-price pressure beyond September.

Growth outlook faces a more difficult policy balance

The RBI recently raised its economic growth forecast for the financial year ending March 2027 by 40 basis points to 7.1%, reflecting continued resilience in domestic activity.

However, the combination of inflation above target and stronger growth gives policymakers less room to ease borrowing costs. Prolonged geopolitical tensions, trade restrictions, and expensive commodities could also weaken business investment.

The December policy decision will test whether the central bank can contain inflation without placing unnecessary pressure on economic activity.

Earlier, we reported that India's central bank tightens forex rules as rupee hits record lows.

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