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Retail inflation likely surged to 9-month high of 6.6% in July

Retail inflation likely surged to 9-month high of 6.6% in July

The headline retail inflation in India is anticipated to have exceeded the upper threshold of the Reserve Bank of India’s (RBI) tolerance range in July, primarily due to a surge in vegetable prices. This surge in inflation is expected to result in a nine-month high for the Consumer Price Index (CPI).

According to a survey of 17 economists conducted by Moneycontrol, CPI inflation is projected to have risen to 6.6 percent in July, up from 4.81 percent in June.

The Ministry of Statistics and Programme Implementation is scheduled to release the retail inflation data for July at 5:30 pm on August 14.

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If the projected CPI inflation of 6.6 percent for July is accurate, it would mark the first time in five months that the inflation rate falls outside the RBI’s prescribed tolerance range of 2-6 percent. Additionally, this would extend the streak of inflation being above the central bank’s medium-term target of 4 percent for the 46th consecutive month.

The potential breach of the RBI’s tolerance band underscores the challenges posed by rising inflation and its potential impact on the economy. Policymakers may need to consider measures to address this trend and maintain price stability.

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The expected significant increase of around 180 basis points in CPI inflation, from 4.81 percent in June to 6.6 percent in July, would mark the largest month-on-month swing in over two years. This surge in inflation is largely attributed to a sharp rise in vegetable prices, particularly tomatoes.

Rahul Bajoria, the head of EM Asia (excluding China) Economics at Barclays, has estimated that the general Consumer Price Index (CPI) rose by 1.9 percent month-on-month in July, representing the highest such increase since April 2020.

Bajoria noted that food prices are anticipated to have risen by 3.4 percent month-on-month in July. This increase would be comparable to the rise observed in April 2020 and slightly below the spike in food prices experienced in July 2014, which was driven by extreme weather conditions impacting vegetable prices. As a result, Bajoria predicts that food and beverage inflation could reach 8.1 percent in July, up from 4.63 percent in June.

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The sharp increase in vegetable prices, contributing to the substantial month-on-month rise in CPI inflation, highlights the influence of factors such as supply disruptions and weather-related events on India’s inflation dynamics. Policymakers and economists closely monitor these trends to assess their potential impact on the economy and consider appropriate measures to manage inflation and maintain overall economic stability.

In addition to the surge in vegetable prices, other food items like cereals, pulses, and spices are expected to contribute to the increase in headline inflation. Despite the government’s efforts to address rising prices, the impact of these measures might take some time to materialize. It’s important to note that these steps, which aim to mitigate inflationary pressures, might not have an immediate effect.

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Core inflation, which excludes volatile food and energy prices, is anticipated to remain relatively stable, hovering around the 5.1 percent mark. This suggests that underlying inflationary pressures stemming from non-food and non-energy factors are not expected to see significant changes.

The interplay between various factors influencing inflation, including food prices, government policies, supply chain disruptions, and broader economic conditions, can lead to fluctuations in headline and core inflation rates. Monitoring and managing these inflation dynamics are crucial for policymakers to maintain overall economic stability and ensure that price levels remain under control.

The markets and the Reserve Bank of India (RBI) have anticipated a significant increase in prices for July, with the central bank revising its Consumer Price Index (CPI) inflation forecast for July-September by 100 basis points (bps) to 6.2 percent in anticipation of the incoming data. This adjustment in the forecast reflects an awareness of the potential inflationary pressures in the economy.

Despite the expected rise in inflation, RBI Governor Shaktikanta Das indicated that the central bank may adopt a patient approach to such short-term inflationary shocks caused by supply-side disruptions, particularly in the case of vegetable prices. Das suggested that monetary policy might tolerate high inflation prints resulting from these temporary shocks for a certain period.

In its most recent meeting on August 10, the RBI’s Monetary Policy Committee (MPC) opted to maintain the repo rate unchanged at 6.5 percent for the third consecutive meeting.

While the median of economists’ estimates places the July CPI inflation at 6.6 percent, Nikhil Gupta of Motilal Oswal Financial Services projects a potentially higher inflation rate, up to 7.6 percent.

Gupta highlighted the possibility of a knee-jerk reaction in the financial markets if the headline inflation reaches 7.5 percent or higher. Such a scenario might lead to speculation about another rate hike by the RBI. However, Gupta does not anticipate further increases in the repo rate by the MPC, as he expects inflation to decrease to around 4.5 percent by October.

The approach of policymakers in assessing and responding to inflation, as well as their considerations of short-term supply shocks versus longer-term trends, plays a crucial role in shaping monetary policy decisions and maintaining economic stability.

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