India's retail inflation falls to five-year low of 3.54% y-o-y in July

By Manoj Kumar and Sarita Chaganti Singh

NEW DELHI (Reuters) – India's retail inflation fell to a five-year low in July as food inflation eased from previous highs due to a base effect, government data showed on Monday.

Annual retail inflation was 3.54% in July, down from 5.08% in June. The latest reading is the lowest since August 2019.

Economists polled by Reuters had forecast inflation of 3.65 percent, based on higher figures from July last year, when inflation reached a 15-month high of 7.44 percent.

Retail inflation fell below the Reserve Bank of India's (RBI) target of 4%, mainly due to the high base effect, suggesting that the slower pace of price increases was temporary. The inflation rate was last below 4% in September 2019.

“The moderation in retail inflation has been as expected. A benign base from last year has largely pushed headline inflation below 4%,” said Swati Arora, economist at HDFC Bank.

Food prices, which account for almost half of retail inflation, rose 5.42 percent year-on-year in July, compared to 9.36 percent in June.

Vegetable prices rose by 6.83 percent in July compared to the same period last year, compared to 29.32 percent in the previous month.

The inflation rate for cereals was 8.14% in July compared to 8.75% in the previous month, while the inflation rate for pulses was 14.77% during the month, up from 16.07% in June.

“On a sequential basis, momentum in the food sector remained strong, largely due to strong prices of vegetables and pulses,” Arora said.

The Indian central bank left its key interest rate unchanged at its ninth consecutive meeting last week, focusing on reducing inflation.

Reserve Bank of India Governor Shaktikanta Das said the country's food inflation remained “stubbornly” high and it was important that monetary policy remained on course to bring inflation down to the medium-term target of 4%.

The RBI expects average inflation of 4.4% in the July-September period and 4.7% in the October-December period.

Core inflation, which excludes volatile food and energy prices, continued to fluctuate around three percent, according to three economists, and was estimated at 3.35 to 3.40 percent in July, up from 3.08 to 3.14 percent in June.

“Given current inflation and growth trends, no change in policy rates is expected,” said Paras Jasrai of India Ratings.

The Indian government does not publish core inflation figures.

India is expected to receive normal rainfall during the annual monsoon, which is crucial to the Asian country's economy, but policymakers remain concerned as the distribution of rainfall is uneven.

(Reporting by Sarita Chaganti Singh and Manoj Kumar; additional reporting by Siddhi Nayak; graphics by Vineet Sachdev; editing by Savio D'Souza and Janane Venkatraman)