Inflation likely edged up to nine-month high in July: report

Bengaluru: India’s retail inflation rose for the sixth straight month in July - the longest stretch of monthly increases since January 2016 - to a nine-month high, largely due to a continued rise in food prices, a Reuters poll predicted.

Despite rising, inflation is expected to remain below the Reserve Bank of India’s medium-term target of 4 per cent, clearing the way for more policy easing.

The July 31-August 6 poll of 30 economists showed retail inflation rose to 3.20 per cent in July from a year ago, a touch above June’s 3.18 per cent.

The expected rise in inflation was mainly based on an increase in food prices and fuel costs - the biggest components of the consumer price index. Food prices have risen due to lower-than-expected monsoon rains over the past two months.

“Vegetable prices increased last month. Retail prices of petrol and diesel also went up as a result of higher taxes. These factors drove inflation up,” said Sameer Narang, chief economist at Bank of Baroda.

However, rains in coming weeks are likely to make up for a shortfall in the first two months of the season that began in June, according to India’s state-run weather office, raising expectations of food prices remaining subdued over the near-term.

Core inflation, which excludes volatile components like food and energy, has been on a downward trajectory since February, suggesting a lack of demand and weak economic activity.

That supports the case for further monetary policy easing. The RBI was expected to cut its repo rate for the fourth consecutive time later on Wednesday. 

“We are not expecting inflation to pick up over the coming months because of subdued demand in the economy,” said Shashank Mendiratta, economist at IBM.

“We also expect inflation to remain below the RBI’s inflation target. That would mean at least two more rate cuts after the forthcoming meeting.”