Source Credit : Portfolio Prints
India’s consumer price inflation rose for the ninth consecutive month, reaching 4.45% in July from 4.38% in June, strengthening expectations that the Reserve Bank of India (RBI) could resume interest-rate hikes later this year.
Despite the increase, July’s inflation reading was slightly below economists’ expectations of 4.50%, according to a Reuters poll, suggesting that price pressures remain elevated but broadly in line with market expectations.
Food inflation accelerated to 5.5% in July, while inflation in personal transport and goods transport rose above 7%, according to data released Monday by India’s Ministry of Statistics and Programme Implementation. The rise in food and transport costs highlights the growing pressure on household budgets and businesses, particularly as higher energy and logistics costs continue to feed into the wider economy.
Earlier this month, the RBI kept its benchmark interest rate unchanged, diverging from several Asian central banks that have tightened monetary policy in response to inflationary pressures linked to disruptions in global energy supply chains amid the Iran war.
India remains particularly vulnerable to energy and supply-chain disruptions. The world’s fastest-growing major economy imports nearly 85% of its crude oil requirements and depends heavily on shipping routes passing through the Strait of Hormuz. Any prolonged disruption to these routes could push up crude oil, transportation and production costs across the economy.
Concerns over global shipping intensified after deadly attacks on vessels in the Red Sea and Gulf of Oman disrupted key maritime routes and raised fears of further supply shortages. The uncertainty contributed to a sharp rise in oil prices, with global crude approaching $90 a barrel on Wednesday.
RBI Governor Sanjay Malhotra acknowledged that headline inflation had moved above the central bank’s 4% target, although he noted that core inflation remained “moderate.” He also said that India’s economic growth had remained resilient, but warned that the outlook was increasingly uncertain because of risks surrounding the southwest monsoon, El Niño, geopolitical tensions and changes in global trade policy.
The RBI expects headline inflation to peak in the quarter ending December, with core inflation also likely to follow a similar trajectory. If inflation continues to accelerate, the central bank could face increasing pressure to tighten monetary policy toward the end of the year.
Morgan Stanley expects the RBI to begin raising interest rates in December, with a cumulative 75-basis-point increase that would take the policy rate to a terminal level of 6.0%. The global brokerage also expects India’s headline inflation to average around 5% in the financial year ending March 2027, driven primarily by firmer food inflation and higher input costs.
The outlook for Indian inflation will therefore depend heavily on developments in food prices, global crude oil markets and geopolitical risks. While domestic demand and economic growth remain relatively strong, a prolonged increase in energy and transportation costs could make it increasingly difficult for the RBI to keep inflation close to its 4% target without tightening monetary policy.
For now, July’s inflation data reinforces a delicate policy dilemma for the RBI: supporting economic growth while preventing temporary supply shocks from becoming persistent inflationary pressures. If food and energy prices continue to rise through the second half of the year, the probability of rate hikes later in 2026 could increase significantly.
