India's retail inflation likely cooled to 5.78% in July

Covid-19 second wave in April and May led to many states reimposing lockdowns, constraining supply chains and leading to a spike in inflation

India's retail inflation likely slowed to a three-month low in July, bringing it back within the central bank's target range, on falling food prices and an easing of supply chain disruptions, a Reuters poll found.

The Aug. 5-9 poll of 48 economists showed consumer price inflation eased to 5.78 per cent last month from 6.26 per cent in June.

If realized, it would be the lowest inflation print since May and within the Reserve Bank of India's tolerance band of 2 per cent to 6 per cent - although well above the mid-point.

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"There's a material drop in edible oil and palm oil prices after tariff reductions and global oil price volatility has eased as well," said Rajni Thakur, chief economist at RBL Bank.

"The inflation trajectory will however continue to remain on the upper end of the RBI's target range for the current quarter given the underlying core pressures."

Seven economists in the poll expected inflation at 6 per cent or above.

Although the economic re-opening eased some supply chain disruption, cooling inflation, the central bank raised its forecast for the fiscal year 2021/22 to 5.7 per cent at its monetary policy meeting on Friday.

"The central bank has built in a sufficient buffer for potential upside risks with this revision which might materialise via demand recovery and service-led inflation," said Radhika Rao, economist at DBS Bank.

A deadly second wave of coronavirus infections in April and May led to many states reimposing lockdowns, constraining supply chains and leading to a spike in inflation.

However, that did not prompt the Monetary Policy Committee to raise the key repo rate from 4.0 per cent this month as the focus remained more on containing the economic fallout from the pandemic.

The RBI also retained its growth estimate at 9.5 per cent for this fiscal year.

"The MPC's confidence on the growth outlook has clearly improved since their June meeting," noted Gaurav Kapur, chief economist at IndusInd Bank.

"While a recovery in economic activity is slowly gaining traction from the bottom of May slack remains in the economy and uncertainty around the pandemic is still quite high, even with a gradual improvement in the pace of vaccination between June and July," Kapur said.

The poll also showed industrial output likely rose 13.5 per cent in June compared with 29.3 per cent in May.

India's infrastructure output, which is comprised of eight industries and accounts for about 40 per cent of the total factories' production, rose 8.9 per cent in June from a year earlier.