Tatsat Chronicle Magazine

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Food Prices Expected to Remain High Due to Inflationary Pressures

India’s retail inflation remains above 7% compared to RBI’s upper target of 6%

Food Inflation

India’s retail inflation, based on Consumer Price Index (CPI) dropped marginally to 7.01% for the month of June as compared to 7.04% percent in May. However, food prices are expected to remain high as inflation rate of vegetables shot up by 17.37%, according to the latest data by the government. The silver lining, if any, is that the inflation rate of pulses, which is an integral part of India staple diet, dropped by 1.02%. Inflation for cereals went up by 5.66%, while the cost of meat and fish increased by 8.61%. Overall, food inflation continued to remain high in June at 7.75%, despite improving marginally from 7.97% in May.

Excluding food and fuel, India’s core inflation was at 6% for the month of June.

High international crude prices continued to push fuel inflation upwards to 10.39% in June compared to 9.54% in May. If international crude prices continue to maintain their current levels, inflationary pressure on the Indian economy is unlikely to abate anytime soon.

Despite the slight drop in retail inflation for the month of June, it remained well outside the Reserve Bank of India’s target band 2% to 6%.

With CPI at 7.01%, remaining above the RBI’s mid-term benchmark of 4% for consecutive months, the central bank is expected to tighten the money supply further at its next Monetary Policy Committee (MPC) meeting scheduled on August 2-4. Earlier in May, RBI hiked the repo rate by 90 basis points, which failed to bring retail inflation under the upper target limit of 6%. Given the current rate of inflation, the central bank has no option but to go in for another round of rate hikes.

India’s economic conundrum is further compounded by increasing trade deficit, which crossed ₹70 billion for April to June quarter and falling value of the rupee, which fell to a record low of ₹79.60 to a dollar on July 13.

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