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.

India’s retail inflation breached the RBI’s 4% target for the first time under the new CPI series, rising to 4.38% in June from 3.93% in May and about 2.7% a year earlier. The latest print reflects a broader pass-through of price pressures that had, until recently, remained concentrated at the producer level, largely driven by spiralling transport and fuel costs since the U.S.-Iran conflict in late February. Consequently, the gap between wholesale and retail inflation has only marginally narrowed. Wholesale inflation (WPI), now based on 2022-23, remained elevated at 9.87% in June, up from 9.68% in May. Fuel and power continued to exert the greatest pressure on producers, recording inflation of 27.41%, only marginally lower than May’s 28.18%. As India imports nearly 90% of its crude oil requirements, the value of merchandise imports surged to $70.8 billion in June from about $54.1 billion a year earlier, even though import volumes did not rise proportionately. This underscores how imported inflation, amplified by crude prices that briefly crossed $110 a barrel, has driven systemic price pressures across the economy. The rupee’s sharp depreciation during the conflict added to these pressures, although RBI intervention in the foreign exchange market helped cushion the fall.

The transport category merits closer examination. Transport inflation more than doubled to 4.31% in June from 1.75% in May, while the sub-group, “transport services for goods”, remained elevated, rising to 7.70% from 7.63%. Another notable pressure point has been restaurants and hotels. Although the government announced a modest reduction in commercial LPG prices earlier this month, it has done little to offset the steep increases through May and June, when the price of a 19.2 kg commercial cylinder in Delhi climbed to around ₹2,930 before easing marginally. The system-wide impact is also evident in food prices, with the Consumer Food Price Index (CFPI) rising to 5.32% from 4.78% in May. Another significant price pressure on the CFPI that must be factored in is the projection of a deficient southwest monsoon and its impact on agriculture, though the extent will become clearer in the weeks ahead. Meanwhile, despite the Centre more than doubling import duties on gold and silver from 6% to 15% in May, Commerce Ministry data suggest that bullion imports have remained robust amid global uncertainty, contributing to higher jewellery prices and household inflation. Although the ceasefire announced in late June briefly eased crude prices, they have begun rising again. Given continuing geopolitical uncertainty and persistent upstream price pressures, inflation is unlikely to return to the RBI’s 4% target soon, leaving no room for a rate cut at the Monetary Policy Committee’s August meeting.