India's retail inflation has eased to a three-month low of 5.59% in July mainly due to moderation in food prices, according to data released by the National Statistical Office (NSO).

After two months, the retail inflation has fallen within the Reserve Bank of India’s (RBI) targeted range of 4% with 2% margin on either side. The Consumer Price Index (CPI) based inflation was 6.26% in June and 6.30% in May.

Inflation in the food basket has slowed down to 3.96% in July from 5.15% in the previous month, according to the NSO data.

Fuel inflation eased to 12.38% in July from 12.68% in June. Core inflation — the non-food, non-fuel inflation component — dipped modestly to 5.7% from 5.9% in June.

Earlier this month, the RBI projected the CPI inflation at 5.7% during 2021-22 — 5.9% in the second quarter, 5.3% in the third and 5.8% in the fourth quarter of the fiscal, with risks broadly balanced. CPI inflation for Q1 in 2022-23 is projected at 5.1%.

ICRA chief economist Aditi Nayar expects inflation to remain sticky in the 5-6% range over the next three quarters. “It’s increasingly difficult to characterise the pressures as purely transitory in nature. A small disruption could push inflation back above the 6% threshold, which implies that some uneasiness will continue about how soon the MPC (monetary policy committee) may embark on policy normalisation,” she said.

Nayar anticipates the MPC to embark on policy normalisation once domestic demand strengthens and starts dominating inflationary pressures, in place of supply-side issues. “We foresee a change in the stance to neutral from accommodative in the February 2022 policy review, followed by a hike in the repo rate of 25 bps each in the April 2022 and June 2022 reviews. Once the liftoff starts, we believe that the MPC will stagger rate increases over a period of time, instead of immediately trying to push real interest rates back into the positive territory,” she said.

Radhika Rao, economist at DBS group research, believes there are latent pressure points to keep an eye on. “As states ease restrictions, there is likely to be a shift away from goods to services-led inflation, with firmer demand to also encourage producers to increasingly pass on higher input prices. Base effects and seasonality are likely to see inflation moderate over the next 3-4 months before firming up again in the March 2022 quarter. With the upward revision in the inflation forecast, the central bank has built-in a sufficient buffer for potential upside risks. Broader policy direction is still pointing to a preference for growth over inflation in the near term, with liquidity moves setting the stage for policy normalisation down the line,” she said.