India's headline retail inflation rate crashed past the upper bound of the Reserve Bank of India's (RBI) 2-6 percent tolerance range in July and shot up to a 15-month high of 7.44 percent, spurred on by a massive increase in vegetable prices, data released by the Ministry of Statistics and Programme Implementation on August 14 showed.
At 7.44 percent, the Consumer Price Index (CPI) inflation print for July is a huge 257 basis points higher than the revised June number of 4.87 percent and is the 46th month in a row that it has come in above the RBI's medium-term target of 4 percent.
One basis point is one-hundredth of a percentage point.
The eye-watering CPI inflation figure for July is way above expectations, with economists having predicted prices likely rose by 6.6 percent. The huge increase in inflation was predicted by just one economist; Nikhil Gupta of Motilal Oswal Financial Services forecast 7.6 percent for the latest number.
Inflation internals
The sharp rise in inflation was driven by higher prices for vegetables, with their index rising 38 percent month-on-month, resulting in a 6.7 percent sequential rise in Consumer Food Price Index and a 2.9 percent increase in the overall CPI.
Markets, as well as the RBI, were prepared for a big increase in inflation in July, with the central bank on August 10 raising its CPI inflation forecast for July-September by 100 basis points to 6.2 percent even as its Monetary Policy Committee (MPC) left the policy repo rate unchanged at 6.5 percent for the third meeting in a row.
With the vegetable price shock seen as being temporary, Governor Shaktikanta Das had said monetary policy can "look through" the high inflation prints caused by such shocks for some time.
Also read: RBI may hike repo rate after CPI inflation breaches upper tolerance band: Economists
However, policymakers will be shocked by the CPI inflation number. For the RBI's revised forecast of 6.2 percent for July-September to be met, CPI inflation will have to average 5.6 percent in August and September. This looks unlikely at the moment, with economists seeing inflation remaining elevated around 6.5 percent in August - data for which will be released on September 12 - given the price developments so far.
| JULY 2023 INFLATION | CHANGE IN INDEX, JUL 2023 VS JUN 2023 | |
| CPI | 7.44% | 2.9% |
| Food | 11.51% | 6.7% |
| Cereals | 13.04% | 1.2% |
| Meat, fish | 2.25% | -2.2% |
| Oils, fats | -16.80% | -0.9% |
| Vegetables | 37.34% | 38.1% |
| Pulses | 13.27% | 2.4% |
| Fruits | 3.16% | 4.5% |
| Clothing, footwear | 5.64% | 0.3% |
| Housing | 4.47% | 0.5% |
| Fuel, light | 3.67% | 1.8% |
| Miscellaneous | 5.05% | 0.4% |
"A lot of the progress made in cooling interest rates post RBI's rate hike pause in April could be undone by what is clearly a transitory food inflation trend," said Debopam Chaudhuri, chief economist at Piramal Group. "Monetary policy makers may have to soothe market nerves, till the next rate decision and limit any unexpected spike in benchmark (bond) yields," Chaudhuri added.
The MPC is scheduled to next meet from October 4-6.
However, there was some comfort in non-vegetable prices, according to Aditi Nayar, chief economist at ICRA, who said CPI inflation only rose to a "relatively tolerable" 5.4 percent if vegetables are excluded.
"Barring food and beverages, and pan, tobacco and intoxicants, the inflation in all other groups eased in July vis-à-vis June, offering some relief," Nayar added.
There was some more good news on the core inflation front, which eased slightly to 4.9 percent in July from 5.1 percent in June, as per Moneycontrol calculations.
While ICRA's Nayar is of the opinion that the bar for a rate hike is quite high - she thinks inflation would need to persist above 6 percent for at least two quarters for the MPC to consider increasing interest rates - others are more concerned.
"…the RBI considers inflation to be primarily a monetary phenomenon. Under this view, it makes no difference whether the inflation comes from core or non-core component parts, because even high non-core inflation eventually gets transmitted to the core via the wage-price spiral," said Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers.
"Given this backdrop, another 25-basis-point rate hike by the RBI is a distinct possibility. At the same time, a rate cut in the next 12 months appears extremely unlikely," Hajra added.
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