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July Retail Inflation Eased To A Five-Month Low Of 6.71%, But Above RBI’s Target

Retail inflation fell below 7% in July and remained above the RBI target for seven months

Retail inflation declined to 6.71 percent year-on-year in July, the lowest since March but above the upper bound of the Reserve Bank of India’s target for seven consecutive months.

In June, inflation remained above 7 percent for the third straight month, at 7.01 percent from a year ago.

Last month, easing food prices – which make up nearly half of the consumer price index package – and fuel costs helped slow the pace of the rise in price pressures.

According to the data, food inflation did indeed decline to 6.75 percent in July 2022, compared to 7.75 percent in June.

“July CPI inflation has declined in line with our expectations, led largely by food inflation, while core inflation remains high and sticky,” said Upasna Bhardwaj, chief economist at Kotak Mahindra.

“The next few readings are expected to be slightly above 7 percent, with inflation likely to hover above the RBI’s upper bound of 6 percent through January 2023. We expect a 6 percent repo rate by the end of 2022, followed by a pause and a shift to neutral policies,” she added.

Most of the slowdown is due to fears of a recession, which has lowered global commodity prices, with the international oil benchmark, Brent oil, falling about 9 percent this month, reaching its pre-crisis low in Ukraine and is below $100 a barrel.

That delay is also due to the delayed reflection of the fuel tax reduction. Government interventions to cut import duties and restrictions on wheat exports also helped.

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Still, consumer price increases are expected to continue at a brisk pace in the coming months, with the RBI’s projections pointing to inflation remaining above the upper bound of the 2-6 percent target.

The short-term inflation outlook is still quite uncertain as the government’s efforts to contain consumer price increases may be less effective due to this year’s uneven rainfall and a weak

The government has instructed the central bank to keep retail inflation at 4 percent, with a tolerance level of plus or minus 2 percent of that rate, which is 2-6 percent.

With inflation prospects elevated, the RBI was forced to raise its key repo rate for the first time in four years, raising it by 40 basis points (bp) at an off-cycle meeting in May, a follow-up increase by 50 basis points in June, and this month was still higher than forecasted 50 basis points, bringing the repo rate to 5.40 percent.

The repo rate is the rate at which RBI lends money to commercial banks, and the latest inflation data suggests that interest rates will continue to rise.

Earlier this month, the central bank kept its inflation forecast for the current fiscal year unchanged at 6.7 percent and said retail inflation would remain above the 6 percent cap for the first three quarters of 2022-23.

The government hopes to contain the rise in price as key factors return to favour, sources said Thursday, adding that India “will be the world’s fastest-growing economy this year and next”.

A further breakdown of the latest data shows a sharp decline in inflation in rural India to 6.80 percent in July, from 7.09 percent in the previous month.

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In urban areas, CPI inflation fell to 6.49 percent from 6.86 percent in June last month.

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Other data from the National Statistical Office (NSO) on Friday showed industrial production rose 12.3 percent in June 2022 from a year ago, compared to a 19.6 percent increase in May.

Industrial production was hit by the coronavirus pandemic in March 2020, when it had contracted by 18.7 percent and contracted by 57.3 percent in April 2020 due to a decline in economic activity due to the lockdown that was in place. set up to contain the spread of coronavirus infections.

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