India's CPI inflation has recently firmed up, rising to 5.54% in September 2026, compared with 4.82% in August, marking the
highest reading under the revised CPI series. The increase is driven largely by sharply higher food prices, with food inflation
climbing to 7.74% and essentials like onions, garlic, and lemons recording steep jumps. Inflation pressures are more
pronounced in rural areas (6.08%) than urban (4.88%).
However, the inflation trajectory remains subject to significant upside risks from deficient monsoon conditions, ongoing El
Niño effects and elevated energy and other commodity prices, which could sustain supply-side pressures. The persistence of
inflation generalisation, reflected in the increase in the number of commodities accounting for 75% of CPI’s weighted
contribution from 25 in August’26 to 31 in September’26, suggests that price pressures are becoming more diffused across
the consumption basket rather than being concentrated in a few items. Against this backdrop, alongside persistent rupee
weakness, we believe that the peak policy rate could reach 6.0%, necessitating a calibrated but firm monetary policy
response to contain inflation and anchor expectations.
The RBI could consider couple of options:
First, it could adopt a calibrated tightening approach by raising the MSF rate in the interregnum by 25 bps from 5.75% to
6%, alongside a 25 bps hike in the repo rate in December which will ultimately lead to a MSF rate at 6.25%.
Second, the RBI could opt for a more decisive 50 bps hike in the repo rate in December policy signaling a stronger
commitment to containing inflationary pressures. The choice between the two options would depend on the persistence
of inflation and the trajectory of the rupee going forward.
Going forward, the RBI’s policy response will depend on the persistence of underlying price pressures, the evolution of food
and energy prices, and the trajectory of the rupee, with the key priority being to prevent temporary supply-side shocks from
translating into broader and more persistent inflationary pressures.
Globally, the FAO Food Price Index increased by 5.8% Y-o-Y in September, reflecting an uptick in international food
commodity prices. According to the FAO research, rice yields during El Niño episodes are typically 1.0-1.5% below their
expected trend, while wheat and maize yields generally remain near normal levels. Stronger El Niño events are
associated with more predictable yield outcomes, though not necessarily more severe declines, whereas weaker events
tend to result in greater variability in yield performance.
We expect Q3 CPI inflation would be around 6.5% and Q4 at 5.6%...and full year FY27 inflation average to be around
5.3%. The estimate largely depends upon pressures from supply side on account of the deficient monsoon, ongoing El
Niño conditions and high energy and other commodity prices.