India’s CPI Inflation Slows To 4.17% In July

India’s retail inflation cooled more than expected in July due to subdued food prices after the Monetary Policy Committee raised interest rates for the second straight time.

Consumer price inflation in July rose 4.17 percent compared with the same month last year, declining from the five-month high of 4.9 percent in June, according to data from the Central Statistics Office. Headline inflation slowed for the first time after rising for the past four months. A Bloomberg poll of economists had expected inflation at 4.49 percent in July.

India’s rate-setting panel has hiked benchmark lending rates twice —in June and in August—to its highest level in two years for tackling inflationary pressure. The country’s inflation-targetting central bank has had a long-term aim to keep CPI at 4 percent. “We took two steps, one in June and one in August, to maximise our chances that we don’t drift away from 4 percent and in fact we move towards 4 percent,” Reserve Bank of India Governor Urjit Patel had said earlier this month after the policy meeting.

Last year in July, inflation had started inching higher from a record low due the seasonal spike in vegetable prices. Muted food prices have kept a lid on the headline CPI till now. That could change soon, according to Morgan Stanley. “Upside risks could emerge from a weak monsoon and also the implementation of the minimum support price hikes due to be implemented from October,” it said in its India Economics report earlier this month.

But policymakers will take a lot of relief from the decline in core inflation for two straight months, according to JPMorgan’s Chief India Economist Sajjid Chinoy However, he said it's too early to call victory. “Let's wait and see if this trend persists,” he told BloombergQuint in an interview.

The fall in inflation was aided by a favourable base effect, according to Devendra Pant, chief economist at India Ratings and Research.

“Inflation numbers from July 2017 till June 2018 had an adverse base effect due to the GST, which led to inflation increasing at a faster pace,” he said in an emailed statement. “Internally, food inflation moderated to a 10-month low and is expected to behave at this pace for next two months before impact of revision of kharif MSP starts impacting inflation.”

The RBI, too, has a keen eye on the impact of MSP hikes even as it said that its impact would only be known after procurement is done. “This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation,” it had said in the policy review.

Pant said core-core inflation, which excludes food, fuel, transport and communication, also moderated to a four-month low of 5.7 percent. Sticky core and core-core inflation were also the reasons for prices to have stayed elevated. “However, this is still higher than the core-core inflation observed during March 2016 to March 2018, suggesting demand pressure in the economy.”

There are other risks to retail prices. The possibility of higher oil prices, volatility in global financial markets, rising household inflation expectations and the fear of a fiscal slippage at state or central level could impinge actual inflation outcomes.

As of now, the inflation data "gives the central bank enough space to stay on hold at the October policy review,” Chinoy said.

Inflation Internals

• Food price inflation stood at 1.37 percent in July compared with 2.9 percent in June.
• Fuel and light inflation stood at 7.96 percent in July compared with 7.14 percent in June.
• Clothing and footwear inflation was at 5.28 percent in July compared with 5.67 percent in June.
• Housing inflation stood at 8.3 percent in July compared with 8.45 percent in June.