Retail inflation breaches RBI’s median target again to hit 4.45% in July | Economy & Policy News

The retail inflation rate inched up to 4.45 per cent in July from 4.38 per cent in June, breaching the Reserve Bank of India’s (RBI’s) 4 per cent benchmark target for the second consecutive month, as eight of the 12 divisions saw higher prices sequentially in July, showed data released by the National Statistics Office (NSO) on Wednesday.

 

Economists ruled out any immediate interest rate hike by the RI’s Monetary Policy Committee (MPC), though they maintained the likelihood of policy tightening in December. Persisting tensions in West Asia and an uneven monsoon were flagged as the key upside risks to the outlook.

 
 

The July inflation reading — the seventh print under the updated 2024 consumer price index (CPI) series — is estimated to be at a 19-month high when compared with the back-series data released by the NSO. Retail inflation exceeded . 4.45 per cent in December 2024, when it stood at 5.22 per cent.

 

“While immediate policy tightening is unlikely, elevated inflation projections for Q3FY27 (third quarter 2026-27) through Q1FY28 suggest that the next move on rates is going to be a hike. Evidence of a generalisation in inflationary pressures in the next few months could result in a rate hike in the December 2026 meeting,” said Aditi Nayar, chief economist, Icra.

 

Food inflation, measured by the Consumer Food Price Index (CFPI), rose to 5.52 per cent in July from 5.32 per cent in June, driven by a sharp increase in the price of items such as ginger (83.62 per cent), garlic (35.36 per cent) and onion (22.54 per cent). 

 

“Food inflation remains high and will continue to show a rising trend,” said Madan Sabnavis, chief economist at Bank of Baroda. He pointed to the divergence within the food basket, with potato and tomato prices easing on higher output while onion firmed on lower production. 

 

“While the monsoon has recovered substantially in July, there has been news of crop damage due to excess rains. Combined with a longer cropping period and, hence, harvest, this will push up prices of pulses in particular. Global prices of edible oils are also high, which is being felt in domestic markets,” Sabnavis warned. 

 

Restaurants and accommodation services recorded 7.72 per cent inflation, among the fastest of any division, as higher fuel costs continued to pass through to prices. Sabnavis attributed this partly to the war-driven rise in fuel prices, noting that outlets had raised prices they tended to be sticky on the way down even as fuel supply normalised.

 

July was the second full month of data after the hikes in petrol and diesel prices in mid-May. The fuel impact was seen in user groups such as transport, where prices increased at 4.43 per cent in July compared to 4.31 per cent in June. 

 

Personal care, social protection and miscellaneous goods and services remained the single biggest inflation driver at 14.77 per cent, as gold and silver prices held sticky at high global levels, despite easing from 16.72 per cent in June.

 

Retail inflation in rural areas rose by 4.84 per cent, faster than the 3.96 per cent recorded in urban areas.

 

Among states, Telangana recorded the highest inflation at 6.32 per cent, followed by Andhra Pradesh  at 5.72 per cent. 

 

Inflation stayed benign for categories such as housing, health, and information and communication, but slightly elevated for education services at 3.64 per cent and clothing and footwear at 3.38 per cent.

 

Sabnavis pegged full-year inflation at 5.2 per cent, with an upward bias, adding that he was working with one rate hike during the year. 

 

The headline inflation is likely to remain stable around 4.5 per cent in August but remain within RBI’s upper tolerance band of 6 per cent, according to Megha Arora, director, India Ratings & Research. “Persistent upside risks are posed by geopolitical tensions and El Niño weather pattern, though some improvement in the latter could be visible in the August print,” she added.  

 

Nayar projected the headline rate to harden to 4.7 per cent in August and to cross the 5 per cent mark in September as the base effect turns unfavourable. She expects CPI inflation to average 5 per cent in FY27.