How 99.6% onion price spike & El Nino risks may pose challenges to RBI's Dec rate decision

Onion prices surged 99.6% as food inflation and El Niño risks may push CPI near 6% before RBI's December rate call. Read what's at stake.

Economists at Bank of Baroda (BoB) expect CPI inflation to settle at 6% in October, with risks tilted to the upside. Core inflation (CPI excluding food and fuel) is likely to remain in the range of 4.6-4.8%.

Bank of Baroda cited higher prices of essential food items such as rice, pulses, edible oils and milk. It expects inflationary pressures to persist in November as well, with food prices emerging as a key risk to the outlook.

"However, a lot is dependent on how the impact of El Nino plays out in states where rainfall is deficient," Bank of Baroda noted.

Essential commodity prices rise 11.1% in October: BoB

BoB's Essential Commodities Index (ECI), which tracks 20 items, rose 11.1% YoY in October, largely due to an unfavourable base effect. On a sequential basis, the index increased 0.8%, compared with a 3.1% rise in September.

"Among 20 items, 15 items witnessed an increase in the inflation rate. The build-up in inflation compared to last month has also picked pace," Bank of Baroda said.

For the first eight days of November, the BoB ECI rose 11.2% YoY and increased 1% on a month-on-month basis, indicating a pickup in price momentum.

Onion prices jump nearly 100%, pulses and rice turn costlier

Onion prices recorded the sharpest increase among essential commodities, rising 99.6% YoY in October. However, the increase was partly due to a favourable base comparison, as onion prices had declined 51.2% in October last year.

Apart from onions, the report highlighted significant price increases in rice, tur, urad dal, milk, gur and oilseeds. Retail prices of edible oils also witnessed broad-based increases, unlike the trend seen in previous months.

Tomato prices increased 6% YoY in October, after declining 39.9% in the corresponding month last year.

On a sequential basis, prices of tomatoes, edible oils, milk, pulses and rice recorded significant increases. However, sugar prices declined 4.5% in October compared with the previous month, following increases of more than 11% in each of the preceding two months.

Global edible oil and rice prices add to inflation concerns

Global commodity prices are also contributing to domestic inflationary pressures. According to World Bank data cited in the report, crude oil prices increased 6.1% sequentially in October and were up 72.2% YoY.

The absence of a formal peace agreement between the US and Iran and continued geopolitical uncertainty supported global oil prices. However, the pace of increase in crude oil and natural gas prices moderated compared with September.

Global edible oil prices remain elevated due to supply disruptions and strong import demand. The Food and Agriculture Organization (FAO) has flagged upside risks to edible oil prices due to strong demand from the biofuel sector and tighter sunflower oil supplies from the Black Sea region.

Palm oil prices are also facing upward pressure due to strong import demand.

Rice prices have also started gaining momentum globally. The FAO's rice price index pointed to higher prices amid harvest delays in exporting countries due to unfavourable weather conditions. These developments are adding to domestic price pressures.

Gold, silver and industrial metal prices decline

Some relief came from the decline in precious and industrial metal prices during October.

Silver and platinum prices fell 11.8% and 9.1%, respectively, sequentially, while gold prices declined 5% during the month. Gold prices were up just 1.2% on a year-on-year basis.

Among industrial metals, aluminium, nickel, zinc and tin prices declined 6.8%, 5.4%, 5% and 3.8%, respectively, on a sequential basis.

However, some metals continued to record significant annual increases. Tin, copper and zinc prices rose 43.6%, 35.1% and 21.1%, respectively, YoY in October.

BoB believes the moderation in basic metal prices could provide greater relief to WPI manufacturing inflation than to retail inflation.

The decline in gold prices could also support core inflation, particularly as the moderation coincided with festive demand. The World Gold Council has recently highlighted stronger gold demand in India, particularly in the jewellery segment, amid higher consumer spending.

El Niño threat, low reservoir levels raise food inflation risks

Weather conditions could emerge as another major risk to India's food inflation outlook.

According to the World Meteorological Organization's November 2026 report, a very strong El Nino event is likely in the calendar year 2027, raising the risk of exceptionally high temperatures.

Bank of Baroda flagged potential weather-related risks in Karnataka, Maharashtra, parts of Andhra Pradesh, Telangana and Rajasthan. These states are among the major producers of tomato, onion and potato (TOP) vegetables.

Domestic reservoir levels are also a concern. "The domestic reservoir levels are also below the same period of last year as on 2 Nov 2026," Bank of Baroda noted.

Lower reservoir levels could put pressure on Rabi sowing and affect agricultural output in the coming months.

However, arrivals of TOP vegetables increased marginally by 0.6% sequentially in October, indicating that supply conditions have remained relatively steady so far.

BoB sees November CPI near 6%; core inflation at 4.6-4.8%

Retail inflation is expected to remain around 6% in November 2026. Core inflation, which excludes food and fuel, is projected at 4.6-4.8%, while abridged core inflation is expected to range between 3.5% and 3.7%.

Bank of Baroda noted that consumer goods companies are limiting the pass-through of higher input costs to consumers to protect sales volumes in an inflationary environment. This could help contain core inflation to some extent.

The decline in gold prices could also provide some relief.

However, food inflation remains the biggest risk to the headline CPI outlook. Rising prices of edible oils, tomatoes and pulses indicate that price pressures are becoming broad-based.

Higher cattle feed costs due to adverse weather conditions could further increase milk prices and push up the cost of other protein-rich food items.

What's going to RBI's stance in December?

India's retail inflation is expected at around 6% in both October and November, the trajectory of food prices will remain crucial in determining the headline inflation trend. The RBI will closely monitor these developments ahead of its December policy meeting on December 2- 4.