Inflationary pressures may stay elevated in coming months, Fin Min warns

A surge in vegetable prices drove India’s headline retail inflation to a 15-month high of 7.44 percent in July from 4.87 percent the previous month.

The finance ministry has warned that inflationary pressures may continue for the next few months and require both the government and the Reserve Bank of India (RBI) to be more vigilant.

"Going forward, while domestic consumption and investment demand are expected to continue driving growth, global uncertainty and domestic disruptions may keep the inflationary pressures elevated for the coming months, warranting greater vigilance by the government and the RBI," the finance ministry said in its Monthly Economy Review report for July, released on August 22.

The comments from North Block came days after data showed that a surge in vegetable prices drove India's headline retail inflation to a 15-month high of 7.44 percent in July from 4.87 percent a month back. The unexpectedly high increase in Consumer Price Index (CPI) inflation forced the government to take more action to check the rise in prices of key food items and it announced a 40 percent export duty on onion on August 19 to discourage exports and ensure sufficient domestic supply.

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Economists expect CPI inflation to stay above 7 percent in August, although there are some signs of prices ebbing, with the government also selling tomatoes at discounted prices in key consumption centres. However, inflation is seen declining rapidly by the time the festival season begins, with some economists seeing it below 5 percent by October.

But, before that, the price increases are set to be greater than forecast. On August 10, even as the Monetary Policy Committee (MPC) left the policy repo rate unchanged at 6.5 percent for the third meeting in a row, the RBI raised its inflation projection for July-September by a massive 100 basis points to 6.2 percent.

Also Read: Need 'major reforms' in supply chains to control food price shocks, says RBI Bulletin

One basis point is one-hundredth of a percentage point.

However, the July inflation print released on August 14 left the revised inflation forecast outdated. In an article published on August 17, RBI staff said inflation was now expected to average "well above 6 percent" in July-September.

"However, the recent price spike of certain food items is expected to be transitory. Tomato prices are likely to decline with the arrival of fresh stocks by the end of August or early September. Further enhanced imports of tur dal are expected to moderate pulses inflation. These factors, along with the recent Government efforts, can soon materialise moderation in food inflation in the coming months," the finance ministry's monthly report added.

The finance ministry also said that the external sector required monitoring to strengthen India's merchandise export growth amid slowing global demand, although services exports are expected to continue to do well.

"Geopolitical and geo-economic concerns have not abated, and they may be an enduring reality for quite some time. Consequently, maintenance of macroeconomic stability is paramount to keep interest rates from rising too much, to underscore the relative attractiveness of India as a zone of performance and promise for domestic and international investors and to maintain steady economic growth," the ministry added.