Key facts
- India's consumer inflation is expected to have risen to 4.3% in June, exceeding the RBI's 4% target.
- This would be the first time inflation has breached the target in 16 months.
- Higher food and fuel prices are primary drivers of the expected increase.
- The Reserve Bank of India (RBI) recently held its key interest rate at 5.25%.
- El Nino weather patterns and geopolitical tensions pose upside risks to inflation.
India's consumer inflation is projected to have surpassed the Reserve Bank of India's (RBI) medium-term target of 4% in June, marking the first breach in 16 months. A Reuters poll of 37 economists forecasts that the annual consumer price index (CPI) will rise to 4.3% in June, up from 3.93% in May. This anticipated increase is attributed to elevated food and fuel prices, compounded by the ongoing U.S.-Iran conflict and concerns over a weak monsoon potentially disrupting crop production.
Economists noted that the expected rise is less indicative of widespread inflationary pressures and more a result of firming prices in food, fuel, and select services. The transmission of higher global commodity and energy costs to retail inflation is expected to be gradual and delayed. Retail fuel prices have already seen increases due to four hikes by state-owned retailers in May, impacting transportation costs.
Societe Generale's India economist, Kunal Kundu, highlighted that the divergence between wholesale and consumer prices, influenced by global commodity costs, suggests a partial and delayed pass-through to consumers. The potential impact of El Nino on monsoon rains and crop yields adds further upside risk to the inflation outlook. The RBI maintained its key interest rate at 5.25% in its last meeting, but a majority of respondents in a prior survey anticipated at least one rate hike by year-end.
Wholesale price inflation is expected to have eased slightly to 9.15% in June from 9.68% in May. Core inflation, excluding volatile food and fuel prices, was estimated at 3.95% for June. The data is scheduled for release on July 13, with individual estimates ranging from 3.65% to 5.50%.