Food inflation surges to 7.74%, oil shock threatens India’s growth momentum

India’s economic growth remains resilient despite a global energy shock, but rising food prices and renewed inflationary pressures are emerging as key risks to the outlook, according to the Economic Division’s Monthly Economic Review for October 2026.

Retail inflation accelerated to 5.54 per cent in September from 4.83 per cent in August, an increase of 71 basis points, as food inflation surged to 7.74 per cent. The review attributed the rise in headline inflation to higher consumer food prices and the partial pass-through of global fuel price increases to the domestic consumer price index (CPI).

The report flagged elevated crude oil prices, higher food inflation and uncertainty surrounding the kharif crop as major challenges for policymakers in the second half of the financial year.

The inflation pickup comes even as industrial activity, automobile sales, tax collections and energy consumption point to sustained economic momentum. The contrast highlights the challenge facing policymakers: sustaining growth while containing price pressures stemming from both domestic supply conditions and global geopolitical developments.

Global energy shock adds to inflation risks

The conflict in the West Asia has pushed up global energy prices, renewing inflationary pressures across major economies and prompting several central banks to tighten monetary policy.

According to the review, Brent crude prices were up 71.8 per cent year-on-year in September 2026, while European natural gas prices had risen 128.6 per cent. Higher energy costs risk feeding into transportation, manufacturing and other business expenses, with implications for domestic prices.

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The report also warned that disruptions to maritime freight routes across West Asia could increase input costs. A prolonged conflict could keep energy and food prices elevated, particularly as inventories decline.

India’s inflation outlook faces additional domestic risks. An intensifying El Niño event could affect soil moisture during the upcoming rabi sowing season, while festive demand could add to near-term price pressures.

The review said supply-side interventions, including the release of onions, stockholding limits on sugar dealers and cuts in basic customs duty on crude edible oils, could help ease price pressures on essential commodities.

Growth outlook remains strong, but risks persist

Despite these headwinds, India’s growth outlook remains comparatively robust.

The review said the Department of Economic Affairs’ nowcasting model estimates real GDP growth at 7.35 per cent in the July-September quarter of FY27, following growth of 7.8 per cent in the April-June quarter.

The International Monetary Fund raised its FY27 growth forecast for India by 0.6 percentage points to 7 per cent while the World Bank, the Organisation for Economic Co-operation and Development and the Reserve Bank of India project growth of 7.1 per cent.

High-frequency indicators suggest that domestic demand and industrial activity continue to support the economy. Gross GST collections grew by around 15 per cent year-on-year in Q2 FY27, compared with approximately 8.4 per cent in the previous quarter.

Domestic automobile sales expanded by around 25 per cent year-on-year during the quarter, with growth across vehicle segments and rural and urban markets. However, the review cautioned that a favourable base effect partly amplified the increase, as purchases had been deferred in August and September 2025 ahead of GST rate cuts.

Industrial production also strengthened, with the Index of Industrial Production rising 8 per cent year-on-year in August. Manufacturing grew 9 per cent, while the Index of Core Industries expanded 7.9 per cent in September.

Manufacturing expands, mining contracts

The industrial recovery, however, remains uneven.

While manufacturing activity strengthened, mining and quarrying contracted 5.6% year-on-year in August. The review also highlighted rising input costs and geopolitical uncertainty as factors that could restrain fresh investment by manufacturers.

The HSBC India Manufacturing Purchasing Managers’ Index rose to 55.1 in September from 52.8 in August, indicating faster expansion in business activity. Employment growth also returned to positive territory after declining in August.

Bank credit to industry grew 18.2 per cent year-on-year in August, while overall bank credit growth stood at 21.6 per cent as of September 30, underscoring continued financial support for economic activity.

Inflation and growth remain the policy balancing act

The Reserve Bank of India’s October policy decision, as described in the review, reflected the renewed inflation challenge: the central bank raised the repo rate by 25 basis points and shifted its stance from neutral to calibrated tightening.

The report noted that approximately 64 per cent of items in the CPI basket continued to record inflation below the RBI’s 4 per cent target, even as the headline rate climbed. Core inflation also increased to 4.33 per cent in September from 4.16 per cent in August.

India’s external position provides some protection against global volatility. Foreign exchange reserves stood at $721 billion as of October 16, equivalent to 10.3 months of import cover. Merchandise and services exports grew 11 per cent year-on-year in September, supported by a 23.1 per cent increase in merchandise exports.

However, the cumulative current account deficit widened to $18.3 billion during April-August FY27 from $12.8 billion in the corresponding period a year earlier.