India's consumer inflation dipped to 6.71% in July, easing for the third month in a row, helped by a slower increase in food and fuel prices and adding to expectations that the central bank may rein in the pace of its policy rate hikes next month.
The year-on-year figure, published on Friday by the National Statistics Office, was marginally lower than the 6.78% forecast by economists in a Reuters poll. But it remained above the central bank's 2-6% tolerance band for a seventh month in a row.
After months of eye-watering inflation readings across much of the world, policymakers are wondering if they may have seen the peak of price pressures given recent evidence of moderation in Japan, China and the United States.
However, few are willing to make definitive calls with the Ukraine war and pandemic continuing to tie up supply lines.
India's retail inflation: https://graphics.reuters.com/INDIA-INFLATION/lgvdwerblpo/chart.png
Economists said they expect the Reserve Bank of India (RBI) to raise its policy rate by at least 25 basis points next month as inflation was likely to remain above its tolerance band through this calendar year.
The MPC will meet from Sept. 28-30.
The decline in global commodity prices and return of foreign investors to the stock markets could allow greater policy leeway to the MPC to undertake less aggressive hike in interest rates, said Garima Kapoor, economist at Elara Capital.
"We expect MPC to hike policy repo rate by another 25 to 35 bps before they pause to assess the impact of 140 bps hike," she said.
The RBI's Monetary Policy Committee has lifted the key repo rate by 140 basis points since May, including by 50 bps this month, while the government imposed restrictions on export of crops including wheat and sugar while cutting fuel taxes.
SOFTENING FOOD PRICES
Government officials expect a fall in prices of food items like edible oil, vegetables and pulses, helped by good rainfall and recent restrictions on foodgrain exports.
Food inflation, which accounts for nearly half the CPI basket, was 6.75% in July, also easing for the third month in a row. Prices of edible oil and some metals fell.
"Inflationary pressures have eased," a government source said on Thursday, adding that the government and central bank would continue to take steps to bring retail inflation below 6%.
Core inflation, excluding volatile food and energy prices, was estimated at 5.79-5.80% in July, lower than 5.96-6.2% estimates in June, said two economists, after the data release.
India does not release core inflation data.
Industrial output rose 12.3% year on year in June, separate government data released on Friday showed, reflecting broadening of economic activities.
Asia's third largest economy, which celebrates its 75th year of Independence from the British colonial rule on Monday, is expected to grow over 7% in the current fiscal year ending in March 2023, the fastest growth among major economies.
"While some headwinds are expected from the external sector, India's large dependence on domestic consumption and investment will shield the economy to a greater extent than expected by the Street," said Rupa Rege Nitsure, economist at L&T Financial Holdings.