Retail inflation dropped to a five-month low of 6.71% in July, offering respite to fiscal and monetary authorities as they strive hard to break the back of inflation. A fall in global commodity prices and the resultant taming of imported inflation, contributed to the easing of price pressures.
Of course, even with the moderation, inflation was still above the central bank’s medium-term target of 2-6% for a seventh straight month.
Meanwhile, industrial output growth moderated to 12.3% in June from a year ago, compared with a 12-month high of 19.6% in May, as a favourable base effect started to wane, according to the official data released on Thursday. The growth may drop further in July to a high single-digit level, as the conducive base effect normalises. Nevertheless, they still reflect underlying momentum, as industrial output exceeded the pre-Covid level (same month in 2019) by a decent 6.7%.
Analysts and senior government functionaries said inflationary pressure may moderate further in August, as global commodity prices, especially of oil and fertiliser, started to ease this month. Normal monsoon showers brighten the prospects of farm production, although a drop in paddy sowing may cause some concern. This means inflation may undershoot the central bank’s projection of 7.1% for the September quarter unless commodity prices flare up again.
However, analysts still expect the central bank to go for a fourth round of rate hike this fiscal in its October review, possibly by 20-40 basis points, given its focus on breaking the back of inflation.
Moreover, any such drop in price pressure will likely be only gradual and not steep, as an on-going pass-through of the spurt in input costs to output prices could keep pressure on headline inflation. A weak rupee, too, will weigh on imported inflation. As such, wholesale price inflation in June eased from May’s over 30-year high but still remained stubbornly elevated at 15.18%, indicating that the pass-through is far from over.
A moderation in food inflation to 6.75% in July from 7.75% in the previous month offset the impact of elevated price pressure in the fuel and light segment. This is despite the fact that grain inflation exceeded 6% after 23 months, partly mirroring a 11% rise in wheat prices.
Core retail inflation eased to 5.75% in July from 5.95% in June. With this, it has remained above the 5%-mark for 26 consecutive months, according to an India Ratings estimate.