Economy

India’s July Retail Inflation Likely Remained Above Central Bank Target, According to Reuters

NEW DELHI (Reuters) – Rising food prices in July have likely kept India’s headline inflation above the Reserve Bank of India’s (RBI) short-term target, highlighting the challenges facing the next central bank governor.

Consumer prices are expected to have increased by 5.90 percent in July compared to the same month last year, exceeding the provisional gain of 5.77 percent in June, based on a Reuters poll of economists.

If the government’s upcoming data aligns with these predictions, July will mark the fourth consecutive month in which inflation exceeds the RBI’s target of 5 percent, which is set to be maintained until March 2017.

During his final monetary policy review on Tuesday, RBI Governor Raghuram Rajan kept key interest rates unchanged, citing potential upward risks to the inflation target.

Rajan, who previously served as the chief economist for the International Monetary Fund, will step down as RBI governor on September 4 after a three-year term to return to academia.

While the government led by Prime Minister Narendra Modi has yet to appoint a successor, the newly appointed governor will be tasked with adhering to Rajan’s inflation target of 4 percent, allowing for a band of plus or minus 2 percent over the next five years.

This summer’s above-average monsoon rains have raised hopes for increased agricultural production, potentially leading to a decrease in food inflation. Early indications suggest that vegetable prices may be starting to decline.

However, the outlook for core inflation remains uncertain due to a shrinking output gap and anticipated demand-driven price pressures from a significant increase in government salaries and pensions.

"The central bank faces a challenging task in meeting its inflation targets," stated Shilan Shah, an economist at Capital Economics.

SALES-TAX IMPACT FORECASTED

The introduction of a sales tax set for next April is also expected to contribute to rising inflation. A government-appointed panel has proposed a standard goods and services tax rate between 17-18 percent, but states are advocating for a higher rate.

Morgan Stanley estimates that a higher rate could push retail inflation up by as much as 0.70 percentage points.

Economists generally believe the RBI’s current cycle of easing, which has seen the policy repo rate reduced by 150 basis points since January 2015 to its lowest level in over five years, is nearing its end.

Most predict another cut of 25 basis points by December, after which the central bank may pause. However, much will depend on who is appointed as Rajan’s successor.

"The selection of a more dovish candidate for the next governor could increase the likelihood of further monetary easing," Shah added.

India’s statistics office is set to release retail inflation and industrial production data at 8 p.m. ET on Friday. Analysts expect factory, mining, and utility output to grow by 1.5 percent in June compared to the previous year, following a surprise 1.2 percent increase in May.

The industrial output data is based on an outdated series not currently reflected in India’s gross domestic product figures, leading analysts to take these numbers less seriously as indicators of the overall economic health.

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