Retail inflation in July breached the upper-end of the Reserve Bank of India’s tolerance level for the first time in five months due to surging food costs, reinforcing the central bank’s concern over uneven monsoon rains affecting crop production.
The consumer price index rose to a 15-month high of 7.44% from a year earlier, according to government data Monday. That’s faster than a median forecast for a 6.5% gain in a Bloomberg survey of economists, and a revised reading of 4.87% in June.
The latest reading comes as the RBI is waging a battle against inflation, resolving to push prices to the mid-point of its 2%-6% range in a durable manner. Last week, it kept the benchmark rates and stance unchanged for a third meeting, and pledged to act should food prices spike further.
Food prices, which make up about half of the inflation basket, rose 11.51%, while fuel and electricity gained 3.67%. Core inflation, which strips out volatile food and energy prices, moderated to 4.9%, the lowest print since April 2020, providing some reprieve.
The monsoons running from June to September have picked up pace after a weak start, yet the rainfall distribution remains a concern. Some rice-growing parts of the northeast and eastern regions have received far less rains, hurting crop sowing. The likely occurrence of El Nino is another worry for policymakers as it brings drier weather conditions and can slash crop yields.
“While the July CPI reading was much higher than our expectation, recent sharp corrections in tomato prices indicate that such spikes are temporary,” said Anubhuti Sahay, an economist with Standard Chartered Bank. She expects retail inflation in August to cool off significantly amid easing prices, however, remains watchful of the impact of monsoons on cereals and pulses.
Economists are also pushing back their rate cut expectations by the central bank deeper into 2024 due to the rising prices. HSBC Holdings Inc. expects the RBI to cut borrowing cost only by the second quarter of next year.
“We continue to anticipate the rate cut cycle to be fairly shallow, limited to 50-75 basis points,” said Aditi Nayar, economist at ICRA Ltd, penciling the first cut in borrowing costs in the second quarter of the next fiscal year ending March 2025.
Rising prices will continue to be a headache for Prime Minister Narendra Modi facing national polls in 2024. Last month, India banned exports of non-basmati white rice, in addition to restrictions on wheat exports to tame prices. It is also weighing a cut in import duties on wheat to manage prices.
Even though vegetable prices could impact in the short term, “the worrying trend is the structural nature of cereals inflation” and that will need intervention, said D.K. Pant, economist with India Ratings, a unit of Fitch.
--With assistance from Abhay Singh.
(Adds fresh economist comment in last paragraph.)
