India's retail inflation reached a seven-month high of 4.82% in August, up from 4.45% in July, primarily driven by broad price pressures across food, housing, and services. A significant contributor to this surge was the sharp increase in sugar prices. The sugar price index jumped by 19% month-on-month in August, leading to a 24% year-over-year inflation rate for sugar. This category, despite representing only 1.4% of the total CPI basket, added approximately 15 basis points to the overall August inflation figure. Economists are now divided on whether the Reserve Bank of India will advance its expected rate hike to October from December, with some analysts, like HSBC, anticipating back-to-back 25 basis point hikes in October and December, raising the repo rate to 5.75%.
The surge in sugar prices is attributed to several factors, including lower-than-expected domestic production, adverse weather conditions, pest damage to sugarcane, and increased demand ahead of the festive season. Government data shows that the all-India average retail price of sugar rose by 15% month-on-month to Rs 55.21 per kg in August, and further by 10% in early September, reaching Rs 60.97 per kg. Crisil, an Indian research and ratings firm, estimates closing sugar inventories for the current season to be around 3.9 million tonnes, which is 25% lower than the previous season and 40% below the five-year average. This structural issue, where consumption steadily increases but supply struggles to keep pace, is expected to keep prices firm in the near term.
In response to the rising prices, the Indian government has taken measures to boost supplies and curb hoarding. These include asking sugar mills to ensure adequate supplies, allowing 1 million tonnes of raw sugar to be imported duty-free until the end of October (the first such imports in nearly a decade), and imposing limits on stock holdings for dealers and bulk buyers. Despite these efforts and a slight easing from recent peaks, retail sugar prices remain elevated. Industry experts, including Crisil's Pushan Sharma, believe that festive demand will absorb much of the additional imported sugar, suggesting that the pressure on prices will continue, and they are likely to remain firm in the near term.
The rising inflation, particularly from food items like sugar, is fueling concerns for the RBI's Monetary Policy Committee. While some economists anticipate a rate hike as early as October, others expect the central bank to wait until December for clearer evidence of generalized price pressures and to monitor global factors like the US Federal Reserve's rate path and volatile crude oil prices. The RBI's actions will also be influenced by broader core inflation, which also saw a tick up in August, and the overall liquidity situation in the market.
