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Will retail inflation in India rise beyond the current 15-month high?

India’s retail inflation rose to a 15-month high of 7.44% in July, sharply higher than 4.87% in June./p>

The sharp rise was due to an increase in the prices of food items, with the consumer food price inflation component rising by 11.51% and the food and beverages basket rising by 11.51%.

There is hope that inflation will soften.

What does RBI’s survey of Indian households show?

India's Inflation Trends and Economic Data

The Reserve Bank of India conducts a bimonthly survey to assess how households perceive inflation.

According to the latest Household Inflation Expectations Survey conducted by the Reserve Bank in July 2023, household perceptions of the current inflation rate have slightly increased by 10 basis points, settling at 8.9%.

This surge in the perception of inflation in India highlights the palpable impact of the price rise on households.

What is the Expectation for Inflation?

Interestingly, inflation expectations for the upcoming three months and the next year have moderated.

The anticipated inflation rates stand at 10.0% and 10.3%, respectively.

These numbers indicate a sense of cautious optimism among Indian households.

According to the data, while Indian households feel the effects of the current economic boom, they hope the inflation rate will stabilise in the coming months.

Impact of Price Rise on Consumption

Among the various consumption categories, the food group stands out. A significant portion of respondents expect a price rise in the food segment over the next three months.

This expectation has remained consistent over the past six survey rounds, highlighting the ongoing challenge of managing food costs amid persistent inflation.

Will RBI Hike Rates?

Raising interest rates is the textbook approach to controlling inflation.

This time around more is needed. Rate hikes can resolve demand-side issues, but this price rise requires supply-side measures.

And the government has been working on it.

The ban on exports of rice, the release of onion from buffer stocks and allowing the import of tomatoes from Nepal are some of the measures taken to cool food prices,

The RBI may not raise rates to control inflation and instead keep talking about inflation to anchor expectations.

While the central bank may not raise rates, it may continue to keep the lid on liquidity by extending the 10% Incremental Cash Reserve Ratio should it find liquidity sloshing around.

The Way Ahead

As India grapples with the current 15-month high inflation, the insights from the RBI's inflation report offer a mix of concern and hope.

While the immediate challenges of the cost hike are evident, the future holds potential stabilization.

The actions taken by the Indian government and the Reserve Bank of India in the coming months will be critical in shaping this trajectory.

What Should Investors Do?

Readers of this blog are aware that we advocate sensible investing.

Sensible investing involves following an investment discipline, asset allocation strategy and staying patient.

Fixed-income investors could selectively lock in passive by buying good quality bonds at attractive yields.

Seek the services of a SEBI-registered investment advisor for advice on the appropriate investment strategy.

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