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Retail inflation eased to 1.55 percent in July, marking its lowest level in eight years and dipping below the Reserve Bank of India's (RBI) comfort threshold for the first time since early 2019. This decline is largely due to lower food prices and a favorable base effect. While rural inflation stood at 1.18 percent and urban inflation at 2.05 percent, regional disparities were notable, with Kerala recording the highest inflation. Experts suggest that despite the current low inflation, a rise beyond 4 percent is expected in the coming quarters, potentially limiting RBI's ability to reduce interest rates further.
Recent government data revealed that retail inflation slowed to 1.55 percent in July, the lowest level since June 2017, and dipped below the Reserve Bank of India's comfort zone for the first time since January 2019. This slowdown was primarily driven by subdued food prices, which saw a year-on-year decline of 1.76 percent the lowest since early 2019. Advertisement
The government has tasked the RBI with maintaining retail inflation, based on the consumer price index (CPI), at 4 percent with a permissible margin of 2 percent on either side. Inflation in June stood at 2.1 percent, and a year earlier, it was 3.6 percent in July 2024.
According to the National Statistics Office (NSO), the marked reduction in headline and food inflation was mainly due to favorable base effects and price declines across pulses, transportation, communication, vegetables, cereals, education, eggs, sugar, and confectionery.
Inflation showed variation across regions: Kerala experienced the highest inflation at 8.89 percent, followed by Jammu and Kashmir at 3.77 percent and Punjab at 3.53 percent. Assam recorded the lowest CPI at negative 0.61 percent. Rural inflation was measured at 1.18 percent, while urban inflation was slightly higher at 2.05 percent.
Economists observed that the persistent year-on-year decline in food prices contributed significantly to lowering retail inflation, though vegetable prices saw an unexpected increase. Aditi Nayar, Chief Economist at Icra, noted that the projected rise in inflation to above 4 percent in the upcoming quarters would constrain RBI's flexibility in cutting interest rates during future monetary policy reviews.
Earlier this month, the RBI chose to keep the repo rate steady at 5.5 percent, adopting a cautious stance to evaluate the effects of international trade policies and previous rate cuts. Since February, the RBI has reduced the repo rate by a cumulative 100 basis points.
Paras Jasrai, Associate Director at India Ratings and Research, pointed out that although inflation fell below the monetary policy committee's target range, the core inflation excluding volatile sectors like food and energy remained stable at 4.1 percent in July, indicating steady demand in the economy.
RBI Governor Sanjay Malhotra, while announcing the August monetary policy, indicated that CPI inflation is expected to rise above 4 percent in the fourth quarter of fiscal year 2025-26 and beyond. This increase will be influenced by unfavorable base effects and demand-side factors arising from policy measures.
The NSO gathers price data from a wide network comprising 1,114 urban markets and 1,181 villages across all states and union territories, ensuring comprehensive coverage of the inflation trends.
Source PTI
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