India's retail inflation (INCPIY=ECI) accelerated in July, led by higher food prices, to a pace that is unlikely to push the central bank to hike interest rates over the next few months.
The consumer price index rose 4.45% from a year earlier in July, marking the second consecutive month when the key price gauge breached the Reserve Bank of India's 4% medium-term target.
However, inflation remained within the 2% to 6% tolerance band of the central bank, which had left its benchmark policy rate unchanged last week, awaiting clearer evidence on whether inflationary pressures had become broad-based in Asia's third-largest economy.
The July print was nearly in line with a Reuters poll that had estimated inflation at 4.5%.
"The RBI can afford to be patient for now, but not forever," said Alexandra Hermann Prasad, lead economist at Oxford Economics.
"Mounting evidence of second-round effects and rising medium-term inflation expectations will make the supply shock increasingly difficult to look through. We expect policymakers to hold fire in October, but to deliver a 25 basis point rate hike in December."
India's food inflation climbed to 5.52% in July from 5.32% in June, on the back of weak monsoon showers, but it is expected to ease with a recovery in rains that could mitigate further price pressures from the impact of the El Nino weather phenomenon.
RBI Governor Sanjay Malhotra said earlier this month that headline inflation moved above target mainly because of higher fuel prices, while broader price pressures remained in check. The central bank has cut its inflation forecast for 2026/27 by 10 basis points to 5%.
India's state-run fuel retailers raised gasoline and diesel prices four times in May in response to rising costs due to the U.S.-Iran war. While a brief pause in the conflict pushed global crude prices lower, they were still about 20% above pre-war levels.
Economists said that while the price of crude was volatile during the month and the absence of any meaningful revision in domestic retail fuel prices is expected to limit the impact on consumers. Transport inflation ticked up to 4.43% in July from 4.31% in June.
India is the world's No. 3 crude importer and consumer.
"Going forward, we continue to expect inflation to rise above 5% from September onwards, keeping the case alive for RBI to turn towards interest rate hike before the end of the year," said Sakshi Gupta, principal economist at HDFC Bank.
