This is an archive article published on August 13, 2022

Opinion A 6.7 per cent inflation print in July raises hopes that India might have seen off the worst of inflation for the time being

Notwithstanding the recent moderation in inflation, steady economic recovery within India as well as a worsening balance of payment situation will likely force the RBI to raise repo rates by another 35 to 60 basis points in the remaining months of the current financial year.

The overall print of 6.7 per cent hides wide differences both across commodities as well as geographies.

August 13, 2022 09:03 AM IST First published on: Aug 13, 2022 at 04:05 AM IST

India’s retail inflation print for July came in at 6.7 per cent. While this is considerably higher than the Reserve Bank of India’s target inflation rate of 4 per cent and even outside its comfort zone (2 per cent to 6 per cent), the July number brings relief. That’s because retail inflation has shown a steady deceleration since it hit an eight-year high of almost 8 per cent in April; it grew at 7 per cent in May and June.

Another reason for comfort is that the RBI had pencilled in an average inflation rate of 7.1 per cent for the second quarter (July, August and September). A 6.7 per cent print in July raises hopes that India might have seen off the worst of inflation for the time being. RBI Governor Shaktikanta Das hit the nail on the head when, on August 5 while announcing the latest monetary policy stance, he said: “The inflation trajectory is now poised at a decisive point. While there are incipient signs of a confluence of factors that could lead to further softening of domestic inflationary pressures, there remain significant uncertainties”.

The overall print of 6.7 per cent hides wide differences both across commodities as well as geographies. For instance, fuel inflation soared by almost 12 per cent in July. While housing inflation was below 4 per cent, food price inflation came in at 6.8 per cent — down from 7.8 per cent in June. But within this broad rubric, prices of vegetables grew by almost 11 per cent, while prices of spices and edible oils grew by almost 13 per cent and 8 per cent, respectively. Inflation also varied across states. For example, the inflation rate was as low as 4.1 per cent in Delhi and as high as 8.9 per cent in Telangana. Assam, Gujarat, Haryana, and West Bengal are the other states where consumers were still experiencing inflation rates in excess of 7.8 per cent, while Himachal, Tamil Nadu and Karnataka witnessed a sub-5 per cent spike in the price level.

However, policy challenges remain. For one, despite some moderation, inflation is likely to be above 6 per cent for the current financial year; not to forget the fact that it was above 6 per cent in the last quarter (January to March 2022) of the last financial year. Since May, when the RBI reacted to April’s inflation spike by calling an unscheduled review, repo rates have gone up by 140 basis points to reach the pre-pandemic level of 5.4 per cent.

Notwithstanding the recent moderation in inflation, steady economic recovery within India as well as a worsening balance of payment situation will likely force the RBI to raise repo rates by another 35 to 60 basis points in the remaining months of the current financial year. However, each effort to bring inflation back to the 4 per cent level will also come at the cost of economic growth.