July retail inflation eases to five-month low of 6.71%; still above RBI's tolerance band

Contrary to popular expectations, retail inflation displayed a slower pace of decline in July and came down to 6.71%. Price cuts on edible oil, ranging from 0.4% to 6.4%, and lower crude oil prices, are being seen as factors that eased retail inflation in July on an annual basis, even as it remained above the Reserve Bank of India’s (RBI) 2-6% tolerance limit band for the 7th month running.

Data released by the Ministry of Statistics and Programme Implementation (MoSPI) on Friday evening showed that retail inflation fell from 7.01% in June and came below the 7% mark for the first time this year due to a moderation in food inflation and oil prices.

While falling to a five-month low in July, retail inflation has now remained above the RBI’s medium-term target of 4% for 34 consecutive months.

“The RBI is just two months shy of failing to meet its inflation mandate, which is deemed to occur when average inflation is outside the 2-6% tolerance range for three consecutive quarters,” experts pointed out.

Participating in a CNBC-TV18 discussion, Indranil Pal of Yes Bank said that though retail inflation had eased, policymakers needed to remain watchful since prices were rising in the first week of August. “In terms of the food inflation, we have worries about the Kharif crop. However, rice stocks continue to be adequate and I don't think there is too much of a significant price pressure there. Except for the fact that vegetable prices are once again rising. If you look at August, vegetable prices of not the typical onions and tomatoes, but some of the other vegetable prices like brinjal have been rising,” Pal said.

A look at the data showed that rural inflation eased from 7.09% in June to 6.8% in July, while urban consumers faced a price rise of 6.49% compared to 6.86% a month earlier.

Consumer Food Prices showed a moderation in inflation to 6.75% in July from 7.75% in June.

The country’s industrial output showed a growth of 12.3% in June, moderating from 19.6% this May. A 16.4% uptick in electricity and a 12.5% increase in manufacturing were seen to be the factors driving it.

India also saw mining activity grow 7.5% in July.

NDTV quoted Upasna Bhardwaj, Chief Economist at Kotak Mahindra, as saying that CPI headline inflation for July had moderated in line with their expectations, led largely by food inflation, while the core inflation remained elevated and sticky.

"The coming few readings are expected to be a tad above 7%, with inflation likely to hover above RBI's upper threshold limit of 6% until January 2023. We expect repo rate at 6% by the end of 2022, followed by a pause and a shift to a neutral policy stance," she added.

“The inflation outlook for the short-term is still quite uncertain because the government's efforts to rein in consumer price increases are less effective. That there is an unevenness in this year's rainfall and that the Kharif crop has suffered due to a paddy shortage are making things worse,” said agro-economist Shrinivas Khandewale.

Over May 2022 levels, the Index of Industrial Production (IIP) grew a mere 0.14%. Manufacturing was the only segment to report a sequential uptick in output in June, going up by 1.34%.

Among use-based categories, consumer durables and capital goods led the growth trajectory. For the second month running, consumer durables and capital goods rose 26.1% and 23.8%, respectively. The output of consumer non-durables remained subdued for the second month in a row, going up just 2.9% in June after a 0.9% rise in May.