Retail inflation in India snapped a three-month downward trend in August by inching marginally to 7 per cent, mainly because of higher food prices, according to the government data released on Monday. Inflation, as measured by the consumer price index (CPI), rose to 7 per cent in August, compared to 6.71 per cent in the last month.
The CPI inflation is above the Reserve Bank of India’s (RBI’s) comfort level of 6 per cent for the eighth month in a row. According to the data, inflation in food basket was 7.62 per cent in August, up from 6.69 per cent in July and 3.11 per cent in August 2021. This may add pressure on the RBI to hike interest rates more aggressively in coming months.
CPI inflation has now spent 35 consecutive months above the Reserve Bank of India’s (RBI) medium-term target of 4 per cent and eight straight months outside the central bank’s 2-6 per cent tolerance band. This macroeconomic data is important for policymakers as it showcases the current state of manufacturing, mining and other important sectors.
The RBI raised its key policy repo rate by 50 basis points (bps) in August to 5.40 per cent, taking the total rise since May to 140 bps. According to analysts, it is expected that the central bank will hike repo rate at least by 50 bps in its next policy outcome.
Food inflation, which accounts for nearly half the CPI basket, soared as prices of essential crops like wheat, rice and pulses were driven higher by a record heatwave, squeezing household budgets. In a bid to tame the rising inflation, the central government already curbed exports of wheat flour towards the end of last month.
According to the data, the index for cereals rose by 2.4 per cent month-on-month in August, while vegetables was up by an even larger 2.5 per cent when compared to July. However, the index for pulses was 1.7 per cent higher.
Erratic monsoon patterns across the country suggest more crop damages, keeping food prices elevated in the coming months, with negative seasonality kicking in for September-November and weighing on price pressures.
On the other hand, industrial growth, as measured by the Index of Industrial Production (IIP), tumbled to 2.4 per cent in July from 12.3 per cent in June. In July, according to the data released by the National Statistical Office (NSO), the manufacturing sector’s output grew 3.2 per cent in July 2022.
IIP growth has been slowing ever since it hit a one-year high of 19.6 per cent in May on the back of a favourable base effect.