Retail Inflation Soars in June, Warranting Pause in Interest Rate Hikes

Retail Inflation Rises in June, Justifying Rate Pause

New Delhi, July 15, 2023: Retail inflation in India climbed to 5.15% in June, driven by higher food and fuel prices. This marks the sixth consecutive month that inflation has exceeded the Reserve Bank of India's (RBI) upper tolerance limit of 6%.

Key Findings:

* The Consumer Price Index (CPI) rose by 5.15% year-on-year in June, compared to 4.97% in May.

* Food inflation rose sharply to 8.34% from 7.04% in the previous month.

* Fuel inflation accelerated to 14.57% from 12.46% in May.

* Core inflation, which excludes food and fuel, also edged higher to 4.44% from 4.35% in the previous month.

Factors Contributing to Inflation:

* Disruptions in global supply chains due to the Russia-Ukraine conflict

* Higher crude oil and commodity prices

* Rising transportation costs

* Monsoon disruptions affecting vegetable prices

Impact on Monetary Policy:

The elevated inflation readings justify the RBI's decision to pause its monetary policy easing cycle in June. The central bank had raised the repo rate by 50 basis points to 4.90% in May.

Economists expect the RBI to maintain a cautious stance on monetary policy in the coming months. Further rate hikes may be necessary if inflation continues to remain above the RBI's target range.

Government Response:

The government has taken several steps to contain inflation, including:

* Reducing import duties on edible oils

* Banning wheat exports

* Providing subsidies on fertilizers and fuel

* Increasing the supply of essential commodities through government-owned channels

Outlook:

Economists expect inflation to moderate in the second half of the year as the impact of monsoon, government measures, and easing global supply chains becomes more pronounced. However, risks remain from geopolitical tensions and global price pressures.

The RBI is likely to continue monitoring inflation closely and take necessary actions to bring it within its target range.

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