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NEW DELHI : Retail inflation in India dropped below the 7% mark for the first time in four months, easing some pressure on the Reserve Bank of India to pursue aggressive monetary tightening.

Inflation based on the Consumer Price Index (CPI) cooled to a five-month low of 6.71% in July from 7.01% in the previous month, amid improved supplies of vegetables and easing edible oil prices, according to data released by the ministry of statistics and programme implementation (MoSPI) on Friday.

Hitting the brakes
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Hitting the brakes

Still, retail inflation has remained above the RBI’s upper tolerance band of 6% for the seventh month in a row.

A Mint poll of 28 economists had predicted the inflation at 6.78%

Economists caution that inflation will likely inch up over the next couple of months due to last year’s low base, even as easing energy and commodity prices would help cool inflationary pressures.

Nevertheless, further rate hikes by the Reserve Bank of India’s monetary policy committee (MPC) are expected over the next few months. RBI has projected inflation at 6.7% for FY23. “Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peak 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, ICRA.

In contrast, the robust domestic demand for services poses risks, given its significant share in the CPI basket (of 23.4%), along with the significant lag in kharif sowing of rice, she added.

Given the base effect, Nayar cautioned that the next two CPI inflation prints could rise slightly from 6.7% in July, “in spite of which we believe that the average inflation for the ongoing quarter will modestly trail the MPC’s projection of 7.1%."

RBI’s monetary policy panel raised the repo rate for the third time in a row earlier this month, taking the policy rate to the pre-pandemic level of 5.4%.

The moderation in CPI inflation was led by easing food inflation to 6.71% in July from 7.56% in June.

The consumer food price index, which includes both manufactured and non-manufactured food articles, showed inflation easing to 6.75% from 7.75% in the previous month.

Inflation in the case of vegetables eased to 10.9% in July from 17.37% in the previous month.

Edible oil inflation moderated to 7.52% in July from 9.36% in the previous month. The rate of price rise in fruits, however, accelerated to 6.41% from 3.1%.

“The near-term inflation outlook remains highly uncertain, as the uneven nature of this year’s monsoon and a weak rupee currency may lessen the effectiveness of government efforts to contain consumer price increases," said D.R.E. Reddy, chief executive officer (CEO) and managing partner, CRCL LLP, a food caterer.

Clothing and footwear inflation eased marginally to 9.91% from 9.52% in June.

Fuel inflation also accelerated to 11.76% from 10.91%.

Brent crude oil prices eased to $99 per barrel on Friday and have declined by 20% over the last two months, amid recession fears and declining demand.

Vivek Rathi, director of research at Knight Frank India, said that the increase in fuel inflation despite government measures to curb fuel prices is a concerning factor.

“Currently, international crude and commodity prices have corrected; this should further soften inflation in India in the coming months. However, rupee depreciation which increases the import costs and the fall in crop yields due to uneven monsoon this year poses a near-term risk to inflation in India," Rathi added.

Annual inflation in FY22 slowed to 5.5% from 6.2% in the previous year.

After rising 20% since the start of 2022, global food prices have fallen about 10% since early June.

India’s wholesale inflation has been over 15% for three straight months up to June.

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