Retail inflation eases to 4.17% in July

India’s retail inflation dropped to a nine-month low of 4.17% in July, from 4.92% a month ago, on the back of softening food prices and a favourable base, according to data released on Monday by the Central Statistics Office.

This has provided comfort to the government and the Reserve Bank of India (RBI). However, a depreciating rupee, which hit an all-time high on Monday at 69.93 against the dollar, and volatile crude oil prices, may lead to considerable uncertainty over inflation.

RBI, in its monetary policy review on August 1, had increased its policy rate by 25 basis points for the second time in two months, blaming rising inflation risks. Analysts expect the central bank to stay paused for the rest of the financial year.

Inflation will depend a lot on the monsoon, which this year gained pace earlier than expected, though nationwide rainfall deficit in the season stood at 10% till Monday. The India Meteorological Department had projected a normal monsoon this year, but its distribution and intensity will be crucial for kharif crop output, which in turn will impact food inflation.

Significant increases in the minimum support prices (MSPs) across crops on July 4, after a modest hike over the past four years, are likely to add 70 basis points to retail inflation, according to India Ratings and Research.

The RBI has also raised its inflation outlook to 4.8% in the second half (October-March) of 2018-19 from its earlier projection of 4.7%. The June round of the RBI’s survey of households reported a further uptick of 20 basis points in inflation expectations, for both three-month and one-year ahead horizons, compared with the last round.

The Asian Development Bank (ADB) had also raised its average inflation projection for India last month from 4.6% to 5% for the fiscal year, because of higher crude oil prices, a depreciating rupee and increase in MSP.