According to statistics ministry data released Monday, the consumer price index grew 4.87% year on year, down from 5.02% in September but somewhat higher than experts had predicted. In India, inflation fell for the third month in a row in October, however authorities are still concerned about rising food prices ahead of elections.

The consumer price index grew 4.87% year on year, according to statistics ministry data released Monday, down from 5.02% in September but slightly higher than experts had predicted.

The minor slowdown was caused primarily by a decrease in core inflation as prices for clothes, home goods, and healthcare fell. Food prices, which account for over half of the consumer basket, remained high, according to the report. Last week, Reserve Bank of India Governor Shaktikanta Das warned about the possibility of food price shocks, implying that authorities will remain vigilant.

"We expect the Monetary Policy Committee to maintain a hawkish tone," with no change in interest rates or policy position at the next policy meeting, according to Aditi Nayar, chief economist at ICRA Ltd., in an email. According to her, inflation will likely rise to 5.6% by December and then continue in a range of 4.9%-5.6% for the next two quarters.

The Reserve Bank of India has held interest rates steady for four consecutive meetings, despite maintaining a rather hawkish policy stance to keep price pressures in line. The RBI's long-term goal is to keep inflation at 4%.

What Bloomberg Economics Has to Say

Because the policy rate differential between the Reserve Bank of India and the Federal Reserve is at an all-time low, the central bank will only begin relaxing monetary policy once the Fed begins to decrease rates. Our US team anticipates that this will occur in the second quarter of next year. Until then, we anticipate the RBI to retain its hawkish stance.

Bonds have traded in a very narrow range over the last month as traders anticipate the RBI keeping interest rates on hold for a prolonged period of time.

The moderation in inflation “provides some relief but we expect the trend of sub-5% headline inflation to remain brief,” said Upasna Bhardwaj, an economist with Kotak Mahindra Bank. She believes the RBI would keep rates on hold for a longer period of time and will employ liquidity tools to control risks.

Food prices increased 6.61% year on year in October, slightly changed from September. Clothing and footwear prices increased by 4.31%, while home prices increased by 3.8%. The cost of petrol and electricity reduced by 0.39%. Core inflation, which excludes volatile food and energy prices, fell to 4.25%.

As the election season approaches, Prime Minister Narendra Modi and his team are focused on keeping food prices and inflation under control. Five states will vote in November, followed by a national election in 2024 in which Modi will seek a third term.

In recent months, the government has taken many initiatives to reduce growing food prices, including banning rice and sugar exports. According to government data, the average price of onions, a crucial ingredient in Indian cuisine, increased by more than 60% last month, forcing authorities to take steps to reduce expenses.

Another aggravating element is the recent fall of the currency. Since July, the rupee has lost more than 1.5% versus the dollar and recently set a record low as the US currency rebounded. Market participants see the RBI's recent involvement in the spot rupee market as an effort by the central bank to keep imported inflation from wreaking havoc on the economy.

"There has to be caution because food prices are inherently unpredictable and volatile in nature," said Vivek Kumar, an economist with QuantEco Research. "The bond market will look at the core number, which gives you comfort."