India’s retail inflation eases to 3.54% in July, lowest in five years

New Delhi: Food prices eased to bring down retail inflation sharply in July—marking the lowest in nearly five years—but factory output fell to a six-month low in June, bringing mixed news for policymakers looking to boost manufacturing and economic growth.

Retail inflation based on the consumer price index (CPI) rose by 3.54% in July, its lowest in 59 months, according to data from the ministry of statistics and programme implementation (MoSPI).

The rise in food inflation, a persistent challenge, at 5.42% in July was the lowest since June 2023, when it was 4.55%. Food inflation had risen 9.36% in June, 8.69% rise in May and 8.70% in April.

To be sure, some economists said the fall in inflation could be a one-off.

“Base effects pulled July inflation sharply lower to 3.5% yoy (year-on-year), below our forecast. Food costs, the category that had been responsible for the bulk of the lift in the headline in recent months, surfaced as the key dampener in July," said Radhika Rao, Executive Director and Senior Economist, DBS Bank.

"Notably, the headline and core inflation have nearly converged, as the latter ticked up to 3.4% yoy. This month’s headline likely marks the bottom for the headline and core prints, but July’s print increases the likelihood that the central bank’s quarterly forecast (for the headline) at 4.4% might be undershot," Rao said adding the fall in retail inflation in July-August could be transient and temporary.

Also Read: Base effect likely to lower July inflation to 3.6%

India’s retail inflation has been below the 6% mark since September, remaining within the central bank’s tolerance range of 2-6% for 11 consecutive months.

Core inflation—goods and services excluding the more volatile food and energy prices—makes up nearly 50% of the basket.

A Mint poll of 21 economists had estimated retail inflation to drop to 3.6% in July from 5.1% in June, primarily due to the statistical effect of a high base last year.

The median projections by these economists suggest a month-on-month increase of 1.5% in CPI despite year-on-year inflation declining sharply.

Food inflation cools

Food prices have remained elevated for over a year—and have stayed above 8% since November—primarily due to last year’s uneven and below-normal monsoon rains.

During July, food inflation dropped to a 13-month low at 5.42%, after remaining above the 7% mark during the last eight months.

The prices of meat, fish, eggs, spices, sugar and confectionery products rose during July, while prices of cereals, fruits, vegetables, and pulses fell on a sequential basis.

Clothing and footwear prices also declined in July, compared with the previous month.

Also Read: Retail inflation for industrial workers eases to 3.67% in June

"While there has been a significant moderation in headline inflation, core inflation remains rangebound at 3.3%. Additionally, the inflation expectation, as witnessed in the RBI (Reserve Bank of India) household inflation expectation survey, indicates a higher level of price pressures amongst the households," said Vivek Rathi, National Director of Research, Knight Frank India.

"Thus, while the July data indicates softening of consumer inflation, the accumulated prices over the last many months could potentially soften the consumption potential of the households," Rathi added.

Among states, Jharkhand, Delhi and Chhattisgarh reported the slowest retail inflation, at 1.72%, 2.06% and 2.16%, respectively, for July.

However, Assam, Bihar, Haryana, Kerala, Odisha, Uttar Pradesh and Jammu & Kashmir witnessed higher-than-average inflation, indicating retail inflation is still considerably high in several states. 

Inflation and the RBI

Last week, the Reserve Bank of India (RBI) left the benchmark repo rate unchanged at 6.5%, signalling that interest rate cuts may take a while.

The RBI expects real GDP growth for FY25 at 7.2%, and CPI inflation at 4.5% for the ongoing fiscal year. It last raised the repo rate to 6.5% in February 2023. 

“The CPI inflation came in higher than our expectations but broadly comfortable and most likely lower than the estimates inferred from RBI’s upward revised Q2 (Q2, FY25) figures. We maintain that RBI will be on a status quo mode on rates for the October policy with a likely shift in stance then," said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

"Scope for a shallow rate easing cycle could open from December but much will be data dependent both in India and the US," Bhardwaj added.

Regulating interest rates is a key instrument for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, reducing demand among banks, financial institutions, and the general public, which can, in turn, bring down consumer spending and inflation.

RBI’s medium-term target for CPI inflation is 4% within a band of plus or minus 2%.

Industrial output falls

Meanwhile, India's industrial output grew at a lower-than-expected 4.2% annually in June, hurt by weaker manufacturing growth.

Economists polled by Reuters had expected growth of 5.5%.

Earlier, India’s factory output rose to a seven-month high of 5.9% in May, up from 5.41% in March and 4.98% in April.

During June, manufacturing output rose 2.6% annually, down from the 3.5% annual growth registered during the same period of the previous year.

Electricity generation was up 8.6% annually in June, compared with a 4.2% rise last year, while mining activity grew 10.3% against a 7.6% increase last year.

Also Read: May retail inflation seen steady at 4.8%: Mint poll

Capital goods production, a proxy for fixed investments, saw a 2.4% annual rise in June (against 2.9% in the year-ago period), while consumer durables production, reflecting consumer sentiment, surged by 8.6% (against a contraction of 6.8% in the year-ago period).

Infrastructure/construction goods production rose by 4.4% last June, against the 13.3% growth registered in the same period of the previous year.

Industrial output growth rose steadily during the last year, managing impressive gains of 10.9% in August and 11.9% in October, driven by strong mining output, festive demand for manufactured goods, and increased electricity generation.

However, growth fell to its lowest point of the year at 2.5% in November.

Since then, industrial growth has shown signs of recovery.

"The IIP growth slightly trailed our forecast (4.5%)... Notwithstanding the mixed trends in the available high-frequency data for July 2024, ICRA anticipates the YoY IIP growth to ease to 2.5-4.5% in that month, amid an adverse base (+6.2% in July 2023)," said Aditi Nayar, chief economist at ICRA Ltd.

"With a slowdown in the government capex amidst the elections and lacklustre rural demand as well, we anticipate a moderation in the GDP growth print for Q1 FY2025," Nayar added.

GDP growth

India’s economy expanded at a blistering 8.2% in 2023-24 (FY24), supported by a 7.8% increase in the January-March quarter, belying fears of a slowdown as manufacturing, electricity, and construction continued to fire on all cylinders.

The high growth in the fourth quarter meant the GDP growth recorded during FY24 beat the National Statistical Office’s forecast of 7.6% for the fiscal year.

For FY25, RBI's economic growth estimate stands at 7.2%.