Inflation Hits 6%. Growth is Likely to Hold Up

Retail inflation inched up to 6% in October, the highest level so far in 2026. Month by month inflation has only gone up this year. The October print was driven in part by food inflation that now stands at 8.94%. At 6%, inflation is now outside the Reserve Bank of India’s (RBI) median inflation target of 4%

Key categories that witnessed price increases in October include transport services, which inched up from 5.01% in September to 5.84% in October and food and beverages—from 7.36% in September to 8.51% in October. These are largely due to the increased international prices of oil and other fuels.

This had prompted the Central bank to increase its policy rate in October when its Monetary Policy Committee (MPC) had met. In that meeting the MPC decided to increase the repo rate—the rate at which RBI lends to banks—by 25 basis point to 5.50%. RBI had also changed its monetary policy stance to “calibrated tightening.” It explained this stance as “…rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook.”

The MPC will meet again in December, and it is widely expected to increase the repo rate by a further 25 basis points.

Food and fuel price increases are not under the Central bank’s control, and it targets a narrower set of prices after food and fuel are stripped out, the so-called “core inflation.” But in general food and fuel prices end up influencing a wider set of prices, pushing up the general price level.

For now, there is little risk that an increase in the policy rate will dampen economic growth. By RBI’s estimates, growth in the second quarter of 2026-27 (GDP Q2, 2026-27) is expected to be 7.2%; Q3 2026-27 at 6.9% and Q4 2026-27 at 6.8%. The overall growth rate for 2026-27 is forecast at 7.1%. The trend in the past few years has been for growth to overshoot the forecasts. Key indicators such as growth of credit to various sectors have increased in double digits, pointing to robust growth in the period ahead.

The government and the Central bank have taken care to ensure that global volatility does not mar India’s growth prospects. India has been an outlier in terms of growth globally for an economy of its size and type. But at some point, the growth-inflation dynamics were bound to interact in a manner necessitating an increase in interest rates. That inflection point was probably reached some months ago even if it is difficult to mark its exactly.