Retail inflation plunged to a 9-month low of 4.17 per cent in July as vegetable prices fell, strengthening views that the RBI will keep interest rates on hold at its review in October after raising them for a second straight meeting on August 1.
The RBI has raised the key repo rate by 0.25 per cent each on inflationary concerns. The next bi-monthly policy is to be unveiled on October 5. Based on the Consumer Price Index (CPI), retail inflation for June has also been revised downwards to 4.92 per cent from the earlier estimate of 5 per cent, Central Statistics Office (CSO) data released on Monday showed. Milk products, meat and fish also showed inflation easing during the month.
However, in the case of eggs, cereals and cooking oil, the rate of price rise was higher than in June. The CSO data shows that inflation in vegetables declined by (-) 2.19 per cent last month, compared to 7.8 per cent in June. The rate of price rise in fruits slowed down 6.98 per cent, as against over 10 per cent in the previous month. However, inflation in the fuel segment based on the changes in the CPI increased to 7.96 per cent from 7.14 in the previous month.
CRISIL chief economist Dharmakirti Joshi said that lower food and core inflation are what brought the headline CPI inflation number down in July. "The sustained rise in core inflation seen till June was one of the main reasons why the RBI had raised its policy, or repo, rate twice since June," he said.
"We believe the RBI will put the policy rate on hold unless pressures from higher than anticipated upside risks to inflation from crude oil, stronger demand conditions, and food prices materialise," he added.
The RBI has raised its benchmark rate by a total of 0.5 per cent at its past two meetings, to 6.5 per cent, while warning about inflationary pressures. Inflation pressures in the economy are expected to build up amid rising international crude oil prices - putting pressure on companies to raise prices.
Petrol prices have climbed 10.4 per cent this year and diesel prices by 15.2 per cent, hurting corporate profit margins and stretching household budgets. Airline ticket prices are also climbing due to a 45 percent 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 percent 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.
Any increase in interest rates by the RBI to control inflation leads to a choking of economic growth as both corporate investments and consumer spending slows down due to the high cost of loans.
A slowdown in the economy means fewer quality jobs are created for vast number of graduates who pass out of the country's engineering colleges and universities.
Prime Minister Narendra Modi, who is gearing up Lok Sabha elections in 2019, has argued that higher state spending on subsidised housing and infrastructure would boost economic growth and dampen inflationary pressures.
India's $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.