India's headline retail inflation rate, as measured by the Consumer Price Index (CPI), fell to a five-month low of 6.71 percent in July, according to data released on August 12 by the Ministry of Statistics and Programme Implementation.
In June, CPI inflation had come in at 7.01 percent.
At 6.71 percent, the July CPI inflation figure is in line with the consensus estimate. As per a Moneycontrol poll, CPI inflation was seen falling to 6.7 percent in July.
Even though inflation fell to a five-month low in July, it has now spent 34 consecutive months above the Reserve Bank of India's (RBI) medium-term target of 4 percent and seven straight months outside the central bank's 2-6 percent tolerance range.
As such, the central bank is only two months away from failing to meet its inflation mandate, which is deemed to occur when average inflation is outside the 2-6 percent tolerance range for three consecutive quarters.
CPI inflation averaged 6.3 percent in January-March and 7.3 percent in April-June. For inflation to average 6 percent or lower in July-September, it cannot exceed 5.7 percent in both August and September.
As per the RBI's own forecast, CPI inflation is expected to average 7.1 percent in July-September. This means CPI data for September, scheduled to be released in mid-October, will likely show the RBI has failed.
In the event the RBI fails, it is required to submit a report to the central government detailing the reasons for failure, the steps it plans to take to return inflation to target, and how long it thinks it would take for inflation to return to the target.
July data internals
The drop in inflation in July was driven by food items, with food inflation falling again to 6.75 percent - also the lowest in five months.
In June, food inflation was 7.75 percent.
Within food, animal proteins and edible oils saw the biggest downward movement in prices. While the index for meat and fish fell 2.9 percent month-on-month in July, that for oils and fats declined by 2.5 percent from June.
The index for vegetables was down 0.1 percent from the previous month and that of pulses was unchanged, indicating no price momentum at all.
However, the index for cereals rose 1 percent from June.
| JUL 2022 INFLATION | CHANGE IN INDEX, JUL 2022 VS JUN 2022 | |
| CPI | 6.71% | 0.5% |
| Food index | 6.75% | 0.1% |
| Cereals | 6.9% | 1% |
| Meat, fish | 3% | -2.9% |
| Oils, fats | 7.52% | -2.5% |
| Vegetables | 10.9% | -0.1% |
| Pulses | 0.18% | 0% |
| Clothing, footwear | 9.91% | 0.8% |
| Housing | 3.9% | 0.6% |
| Fuel, light | 11.76% | 2% |
| Miscellaneous | 5.91% | 0.5% |
On the whole, the general index of the CPI was 0.5 percent higher in July compared to June.
Like the headline retail inflation rate, core inflation - or inflation excluding food and fuel - fell in July, coming in at 5.8 percent as against 6 percent in June.
Core inflation, seen as an indicator of underlying demand, dropped even as prices of clothing and footwears increased sequentially in July.
"Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peaks seen in mid-June, which bodes well for easing domestic input cost pressures and the core CPI inflation in the next few months," said Aditi Nayar, chief economist at ICRA.
"In contrast, the robust domestic demand for services poses risks, given its significant share in the CPI basket, and hence, remains a key monitorable, along with the significant lag in kharif sowing of rice," Nayar added.
While the fall in CPI inflation from 7 percent-plus levels will be welcomed by policymakers, economists expect the Monetary Policy Committee (MPC) to announce another repo rate hike at the end of its next meeting, scheduled for September 28-30.
So far in the current rate hike cycle, the MPC has increased the repo rate by 140 basis points to 5.4 percent - all in the last three months. Economists widely expect the repo rate to be close to 6 percent by the end of FY23.
