​A predictable rise: On inflation

A rise in India’s July retail inflation was a foregone conclusion, but its modest increase, at 4.45%, up from 4.38% in June, is still the highest in 19 months, since December 2024. This is the second consecutive month that retail inflation has stayed above the Reserve Bank of India (RBI)’s 4% target, even while remaining comfortably within its 2%-6% tolerance range. Predictably, it has again been driven by food, fuel and transport, even as core inflation, excluding precious metals, has remained below 3%. What is telling is the extent of rural, food-led inflation, which rose from 5.45% in June to 5.79% in July, while urban food inflation decreased marginally from 5.09% to 5.05%. Staples such as onion (22.54%), garlic (35.36%) and ginger (83.62%) fuelled the rise, even as potato (-16.56%) and tomato (-4.59%) moderated. Transport, however, continues to have a wider impact, pointing to elevated input-cost pressures. Transport inflation quickened to 4.43% in July from 4.31% in June, while the crucial subdivision, transport services for goods, rose from 7.70% to 7.77%. Despite the July 1 cut in commercial LPG prices of about ₹183, food and beverage serving services inflation quickened to 7.75% in July, indicating that restaurants are yet to recoup revenues and margins lost following the steep operating costs from March through May. Commercial LPG was cut by a further ₹202 on August 1, but this is unlikely to immediately bring down menu prices.

The monsoon remains a concern, with parts of western, central and southern India remaining rain-deficient. Precious metals inflation, particularly gold (32.98%) and silver (109.84%), moderated, but remains extraordinarily high. Crude prices were relatively stable during the July CPI reference period, but began rising again in August. More worryingly, Ukraine-related disruptions around Russia’s Black Sea export infrastructure, particularly Novorossiysk, could raise freight and risk premiums for Russian crude. Russia supplied nearly half of India’s crude imports in June, making such disruptions relevant to India’s landed energy costs. The rupee also depreciated by about 1.6% between the June 15 and July 15 CPI reference dates, further amplifying imported inflation. In the background, there are signs of weakening economic momentum, with the HSBC composite PMI showing a sharp fall from 57.1 in June to 54.3 in July, its weakest expansion since March 2022. While the PMI is a high-frequency indicator and need not reflect a long-term trend, it is nevertheless worth taking note of. The RBI’s Monetary Policy Committee, which held the repo rate at 5.25% for the fourth consecutive meeting in August, is therefore likely to remain on hold through the second quarter of FY27, as it weighs persistent supply-side inflation against weakening economic momentum.