India's retail inflation accelerated to 5.5% in September from 4.8% in August, as reported by the National Statistics Office (NSO). This acceleration represents the first time retail inflation has crossed the 5% mark under the new CPI series, which was released earlier this year. The September CPI reading came slightly below the market estimate of 5.58%, but it breached the RBI target for the fourth straight month as food rates continue to bite into overall price pressures. The inflation reading remains within the Reserve Bank of India's tolerance band of 2%-6%, though it moves closer to the upper end of this range. Compared with the earlier 2012-base series, the revised index uses an updated framework to measure changes in household prices, with inflation reaching its highest level since October 2024, when inflation stood at 6.21%.
Food inflation emerged as the primary driver of the overall inflation acceleration, zooming to 7.7% in September according to NSO data, up from 6% in August. The Consumer Food Price Index (CFPI) showed a significant increase, with food and beverages inflation also climbing to 7.36% from 5.66% in August. Among individual items, onion prices saw the steepest increase, with inflation surging to 108% in September from 49% in the previous month. The drought conditions have emerged across multiple states, with drought declared in Karnataka, Maharashtra, Andhra Pradesh, Telangana, and Rajasthan, according to a Dun & Bradstreet report. The India Meteorological Department (IMD) states that strong El Nino conditions exist over the equatorial Pacific and will continue to increase through the end of the year, with the term "super El Nino" used when the Nino 3.4 anomaly exceeds +2.0°C. Garlic prices accelerated 55% from 44%, while lemon prices surged 36% during the month. However, some vegetables continued to provide relief, with potato prices falling 11%, tomato prices down 8%, and lady finger prices declining 4.5%.
The inflationary pressures showed significant regional variation, with rural inflation rising to 6.08% in September from 5.24% in August, while urban inflation increased to 4.88% from 4.31%. This divergence between rural and urban inflation remains notable, with rural consumers facing a sharper rise in overall prices. Among major CPI components, clothing and footwear inflation stood at 3.93% in September, while housing and utilities inflation was at 2.74%. Paan, tobacco and intoxicants recorded inflation of 4.8%, and personal care and miscellaneous inflation fell to 13.75% from 15.17% in August. The pressure was more pronounced in rural India, where rural food inflation stood at 8.06% compared with 7.18% in urban areas. The CPI (General) index for the combined category increased to 109.49 in September from 108.74 in August, while the combined CFPI index rose to 112.17 from 110.73 during the same period.
Among states with a population of more than 50 lakh, Tamil Nadu had the highest headline inflation at 6.81%, followed by Odisha at 6.70%, Madhya Pradesh at 6.68%, Telangana at 6.64% and Andhra Pradesh at 6.29%. The fuel impact was evident across user groups, with inflation in restaurants and accommodation services rising to 9.36% from 8.38%, and transport inflation increasing to 5.01% from 4.6%. Outside food, precious metals remained a major contributor, with silver jewellery inflation easing to 87.80% from 106.81% but remaining the second-highest among key items. This kept the personal care, social protection and miscellaneous goods division at 13.75%, the highest among all 12 major divisions. The September reading signals renewed pressure on household budgets, particularly for consumers facing higher food bills. The impact of the prolonged conflict in West Asia is also showing up, with sectors such as transport and restaurants seeing steady increase in costs.
The Reserve Bank of India responded to these inflationary pressures by raising its key repo rate by 25 basis points to 5.50% on Wednesday, marking its first hike in nearly 4 years. According to Reuters, the RBI signalled the possibility of further policy tightening, with economists expecting another rate increase in December. Anitha Rangan from RBL Bank noted that underlying price pressures are significant and the RBI may need to be more aggressive in their approach. The central bank's decision to keep the cash reserve ratio unchanged at 3% suggests a measured approach to liquidity management while addressing inflation concerns. The RBI expects CPI inflation to average 5.2% in 2026-27, with inflation projected to rise to 6% in the December quarter before easing to 5.7% in the March quarter.
Looking ahead, the state of the kharif crop is crucial as food inflation will be largely driven by it, according to Madan Sabnavis, chief economist at Bank of Baroda. "As of now higher inflation is mainly due to depletion of earlier stocks as we head to the new season. Crop arrivals are hence important," he noted. Devendra Pant, chief economist at India Ratings and Research, said that headline inflation in October 2026 is expected to be around 6%, with an adverse base effect playing a role in higher inflation. The NSO collected price data from 1,407 urban markets, including online markets, and 1,465 villages across states and Union Territories, with a 100% response rate in both rural and urban markets ensuring comprehensive coverage of price movements. The government will release the Consumer Price Index data for October 2026 on November 12, 2026, or the next working day if the scheduled date falls on a holiday.
