Retail inflation seen falling to 6.7% in July, June IIP growth may drop to 10.6%

Data from the Department of Consumer Affairs shows that prices of all six edible oils on which data is available fell in July from June. The drop ranged from 0.4 percent to 6.4 percent.

The price of pulses also broadly fell in July. While the price of tur and urad dal rose 1.1 percent and 0.2 percent month-on-month, respectively, in July, the prices for gram, moong and masoor dal fell 0.2-0.4 percent.

Among vegetables, though the prices of potato and onion increased by 6 percent and 5.8 percent, respectively, in July from June, tomato prices were down a massive 24.2 percent.

Overall, food and beverage inflation likely fell to 6.6 percent in July from 7.56 percent in June, said Rahul Bajoria, chief India economist at Barclays.

While petrol and diesel prices were largely unchanged in July, Mumbai posted a 2.4 percent fall in petrol prices and 1.7 percent in diesel prices after the new Eknath Shinde-led state government cut state taxes on July 14.

Core inflation–or inflation excluding food and fuel–is likely to have been largely unchanged. In June, it had come in at 6 percent.

Policy impact

At 6.7 percent, July CPI inflation would be above the Reserve Bank of India's (RBI) medium-term target of 4 percent for the 34th straight month and outside the central bank's 2-6 percent tolerance range for the seventh consecutive month.

However, it would also support the thesis that inflation likely peaked at 7.79 percent in April.

Last week, the RBI lowered its inflation forecast for July-September to 7.1 percent from 7.4 percent. While an inflation print of 6.7 percent in July would be well below that figure, an unfavourable base effect in August and September could see inflation rise in the next couple of months and result in the RBI failing to meet its mandate.

The RBI is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters. So far, inflation has averaged 6.3 percent in January-March and 7.3 percent in April-June.

On August 5, RBI's monetary policy committee raised the repo rate by 50 basis points to 5.4 percent, meaning interest rates have been hiked by 140 basis points in the space of just three months.

The committee will next meet on September 28-30, two weeks before inflation data for September will be released. If average CPI inflation for July-September is also outside the 2-6 percent band, the RBI must submit a report to the government—commonly referred to as 'the letter'—spelling out the reasons for failure, the remedial actions it proposes to take, and an estimate of the time period within which inflation will return to target.

IIP growth

Separately, the statistics ministry will also release industrial production data for June, also at 5.30 pm today.

Industrial growth, measured by the Index of Industrial Production (IIP), is seen nearly halving to 10.6 percent in June from May's 19.6 percent, according to the median of estimates by 15 economists polled by Moneycontrol.

The restrictions caused the general index of the IIP to fall from 126.1 in April 2021 to 115.1 in May 2021. However, activity levels improved in June 2021, with the index rising 6.7 percent from the previous month.

Despite another month of year-on-year double-digit growth, industrial production in June is likely to have been lower compared to May.