India’s retail inflation rate rises for the first time in 5 months in June

India’s retail inflation rate rose for the first time in five months in June due to a sharp rise in food prices, government data showed on Friday.

Annual retail inflation was 5.08 per cent in June, up from 4.75 per cent in May. Economists polled by Reuters had forecast inflation at 4.80 per cent.

Prices of food, which account for nearly half of the retail inflation, rose 9.36 per cent from last year in June compared to an 8.69 per cent rise in May.

Food prices have been accelerating at more than 8 per cent year-on-year since November 2023.

Vegetable prices rose 29.32 per cent in June against 27.33 per cent in the previous month, as extreme heat and heavy floods in India’s northern states disrupted agricultural production.

“The heatwave impact has been seen on vegetables ... These products will continue to witness high inflation,” said Madan Sabnavis, economist at Bank of Baroda.

Higher rural inflation coupled with food prices “is a cause of concern both for consumption and investment growth,” said Devendra Pant, an economist at India Ratings.

For June, rural inflation was 5.66 per cent compared to 4.39 per cent in urban areas, government data showed.

Inflation rate for cereals was 8.75 per cent in June compared to 8.69 per cent in the previous month, while that of pulses eased to 16.07 per cent from 17.14 per cent.

Core inflation, which strips out volatile food and energy prices, continued to hover around 3% and was estimated between 3.08% and 3.14 per cent in June from 3.12 per cent in May, according to three economists. The Indian government does not release core inflation data.

High food prices have led to the Reserve Bank of India (RBI) keeping its key interest rate unchanged at 6.50 per cent for eight consecutive meetings.

RBI Governor Shaktikanta Das on Thursday said it will be too early to talk about a change in the monetary policy stance till inflation is somewhere close to the central bank’s 4 per cent target.

“Any rate action can be considered only in October, and will be heavily data dependent,” Sabnavis said.

Annual retail inflation was 5.08 per cent in June, up from 4.75 per cent in May. Economists polled by Reuters had forecast inflation at 4.80 per cent. Prices of food, which account for nearly half of the retail inflation, rose 9.36 per cent from last year in June, compared to an 8.69 per cent rise in May. Food prices have been accelerating at more than 8 per cent year-on-year since November 2023.

Swati Arora, Economist, HDFC Bank, Mumai said that the food inflation continues to remain high. Going forward, a favourable monsoon is likely to support a moderation in food prices in Q2, FY25.

CPI inflation is expected to move below 4 per cent in Q2, led by a base effect and coupled with a moderation in food prices. We expect CPI to average at 4.6 per cent in FY25.

Radhika Rao, Senior economist, DBS Bank, Singapore, said: “The Reserve Bank of India’s monetary policy committee’s (MPC) concern over the trajectory of food inflation played out in the June data. Inflation rose 5.1 per cent year on year, close to our forecast of 5 per cent, on higher food costs, reflected in the steeper month-on-month rise assumption vs 0.7 per cent in May.

A weak start to the southwest monsoon in June and a prolonged heatwave impacted vegetable prices, in turn, pushing food and beverages inflation back above 8 per cent.

With the MPC’s concerns validated, we don’t expect the central bank to deviate from its preference to keep the repo rate on hold when they meet next month.

Sakshi Gupts, Principal economist, HDFC Bank, Gurugram, said: “Going forward, inflation is expected to drop from July onwards due to a high base effect.That said, the RBI is likely to look through these statistical factors and is unlikely to act on the policy rate or stance in the August policy, given the continued pressure seen in food prices. We continue to see the possibility of rate cuts not before December 2024.

Garima Kapoor, economist, institutional equities, ELara Securities, Mumbai said, “The surge in perishable inflation, amid weather-led supply disruptions and stickiness in protein items, led to a spike in inflation in June.

Hereon, although there is a supportive base effect for Q2, the pass-through of telecom tariff hikes will have an impact. We do not see MPC cutting rates before Q4 FY25.

Upasna Bhardwaj, Chief economist Kotak Mahindra Bank, Mumbai, The CPI inflation came marginally higher than our expectations. While the food inflation risks will continue to dominate in the near term, we expect the better sowing patterns and spatial distribution of rains to eventually ease price pressures beyond these volatile months.