Retail inflation cools to 6.71% in July, remains above RBI's tolerance

Retail inflation, measured via Consumer Price Index (CPI), continued its gradual downward trajectory in July, easing to 6.71% from 7.01 in June and 7.04% in May. This decline in consumer prices comes as the Reserve Bank of India (RBI), in line with its global counterparts, continues with its policy rate hikes to rein in mounting inflationary pressures stemming from the Russia-Ukraine war and subsequent rise in fuel and commodity prices.

Consumer price inflation, however, remains above the central bank’s upper tolerance band of 6%, and core inflation continues to be elevated and sticky, putting downward pressure on the country’s economic growth.

Inflation in rural and urban regions during July receded sequentially in similar proportion, coming down to 6.8% and 6.49%, respectively.

Inflation in food basket, or Consumer Food Price Index (CFPI), came down significantly during the month under review to 6.75%, from 7.75% in June.

Fuel prices remained elevated for another month, marking the second highest rise among all categories at a rate of 11.76% during July. It was outdone only by spices, which saw prices increase 12.89%.

Vegetable prices also saw double-digit growth at 10.9% during the month. The only category to log a decline in prices was eggs, which saw prices fall by 3.84%.

“CPI headline inflation for July has moderated in line with our expectations led largely by food inflation while the core inflation remains elevated and sticky. The coming few readings are expected to be a tad above 7% with inflation likely to hover above RBIs upper threshold limit of 6% until January 2023. We expect repo rate at 6% by end of 2022 followed by a pause and a shift to neutral policy stance,” says Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

At the beginning of this month, the Monetary Policy Committee (MPC) of RBI had unanimously decided to hike repo rate by 50 basis points to 5.4%, with this third consecutive hike taking the key policy rate to its pre-pandemic levels, and highest since August 2019.

The central bank has also decided to focus on withdrawal of the accommodative policy stance to control inflation and support the economy amid other challenges, including rupee depreciation, unemployment and global supply chain disruptions.

The RBI’s latest repo rate hike — announced primarily to tame the high inflation of over 7% for three months now — is in sync with market expectations of a 25 to 50 bps increase in the key lending rate.

“Inflationary pressures are broad-based, and core inflation remains elevated. Volatility in the global market is leading to imported inflation,” RBI governor Shaktikanta Das had said while announcing the monetary policy.