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As Consumer Inflation Eases In July, RBI Seen Holding Key Interest Rates

The RBI has raised its benchmark rate by a total of 50 bps at its past two meetings, to 6.5 per cent, while warning about inflationary pressures.

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As Consumer Inflation Eases In July, RBI Seen Holding Key Interest Rates

July was the ninth straight month in which inflation was higher than the RBI's medium-term target


New Delhi: Retail inflation eased in July, strengthening views that the Reserve Bank of India (RBI) will keep interest rates on hold at its review in October after raising them for a second straight meeting on August 1. In July, consumer prices rose 4.17 per cent from a year earlier, compared with a downwardly revised 4.92 per cent in June, the statistics ministry said on Monday.

The median forecast of economists polled by Reuters for July was 4.51 per cent, with estimates ranging from 3.75 per cent to 5.40 per cent.

Rupa Rege Nitsure, chief economist at L&T Finance Holdings, said retail inflation significantly slowed due to smaller increases in food prices and housing.

"I expect the RBI (Reserve Bank of India) to take a pause until December at least. However, rupee depreciation remains a major risk to inflation besides the sticky core inflation," she said.

July was the ninth straight month in which inflation was higher than the RBI's medium-term target of 4 per cent.

The RBI has raised its benchmark rate by a total of 50 basis points at its past two meetings, to 6.5 per cent, while warning about inflationary pressures.

The RBI's next policy decision is on October 5.

The falling rupee , which has so far lost over 8 per cent this year, has pushed up prices of imported items such as petroleum products, commodities, electronics and engineering equipment.

On Monday, the rupee touched an all-time low of 69.95 against the dollar on concerns about contagion from Turkey spilling over to other emerging markets.

The International Monetary Fund, in its annual report on India last week, warned that average inflation is likely to rise to 5.2 per cent in the fiscal year 2018-19 from a 17-year low of 3.6 per cent in the previous fiscal year.

The IMF expects the central bank to gradually tighten monetary policy in order to tame inflation.

Inflation pressures in the world's sixth largest economy are expected to build up amid rising international crude oil prices - putting pressure on companies to raise prices.

Retail gasoline prices have climbed 10.4 per cent this year and diesel prices by 15.2 per cent - hurting corporate profit margins.

In the last year, the cost of compressed natural gas (CNG) for automobiles and taxis in the capital Delhi has gone up 34.7 per cent. Airline ticket prices are also climbing due to a 45 per cent rise in fuel costs.

However, annual retail food inflation, which accounts for about half of the CPI index, eased to 1.37 per cent in July, compared with 2.91 per cent rise in the previous month.

Core annual consumer price inflation was seen at around 6.2 per cent in July, easing slightly from 6.3 per cent in the previous month, according to analysts.

Prime Minister Narendra Modi, who is expected to seek a second term in national elections in 2019, has argued that higher state spending on subsidised housing and infrastructure would boost economic growth and dampen inflationary pressures.

The $2.6-trillion economy grew at a 7.7 per cent annual rate in the April-June quarter, and is projected to grow nearly 7.5 per cent in the fiscal year ending in March 2019, up from 6.7 per cent the previous year.

© Thomson Reuters 2018


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