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

Representation Image

India's headline retail inflation is expected to have crashed past the upper bound of the Reserve Bank of India's (RBI) 2-6 percent tolerance band in July on its way to a nine-month high due to a surge in vegetable prices.

According to a Moneycontrol survey of 17 economists, Consumer Price Index (CPI) inflation likely jumped to 6.6 percent in July from 4.81 percent in June.

The Ministry of Statistics and Programme Implementation will release retail inflation data for July at 5:30 pm later today on August 14.

At 6.6 percent, the expected CPI inflation print for July will be outside the RBI's mandated tolerance band for the first time in five months. It will also be the 46th month in a row that inflation has been above the central bank's medium-term target of 4 percent.

Inflation internals

The expected rise of nearly 180 basis points in CPI inflation – from 4.81 percent in June to 6.6 percent in July – would be the largest month-on-month swing in more than two years. And the dizzying rise in vegetable prices, particularly those of tomatoes, is the prime driver, with Rahul Bajoria, head of EM Asia (ex-China) Economics at Barclays, estimating that the general index of the CPI rose 1.9 percent month-on-month in July - the highest such increase since April 2020.

"We estimate food prices rose 3.4 percent month-on-month in July, which would also be on par with the rise in April 2020 and just modestly below the spike in food prices recorded in July 2014, when extreme weather pushed up vegetable prices," Bajoria added, predicting that food and beverage inflation was 8.1 percent in July, up from 4.63 percent in June.

Also Read: Spice prices begin to simmer as erratic rainfall hits production

Meanwhile, core inflation is seen little changed around the 5.1 percent mark.

Policy impact

Markets, as well as the RBI, are prepared for a big increase in prices in July, with the central bank raising its CPI inflation forecast for July-September by 100 bps to 6.2 percent in anticipation of the incoming number. However, given that the supply-side shocks pushing up vegetable prices are expected to be short-term in nature, "monetary policy can look through high inflation prints caused by such shocks for some time", RBI Governor Shaktikanta Das said on August 10.

Also Read: FinMin says rise in food inflation warrants guarded approach by govt, RBI

On August 10, the RBI's Monetary Policy Committee (MPC) left the repo rate unchanged at 6.5 percent for the third meeting in a row.

While the median of economists' estimates for the July CPI inflation print is 6.6 percent, Nikhil Gupta of Motilal Oswal Financial Services sees it rising to as high as 7.6 percent.

"If the headline inflation comes in at 7.5 percent or higher, we believe there could be some knee-jerk reaction in the financial markets, creating noise about another rate hike by the RBI," Gupta said in a note on August 7. He, however, does not expect the MPC to increase the repo rate any further as inflation may fall to around 4.5 percent by October.