India’s retail inflation eased marginally to 7.01% in June from 7.04% in May, but remained higher than the Reserve Bank of India’s (RBI) upper tolerance limit of 6% for the sixth consecutive month. This signals the prospect for further rate hikes by the RBI.

In the year-ago period, retail inflation, based on the consumer price index, was at 6.26%. 

Inflation is expected to remain elevated with only a gradual descent through the rest of the year. While the softening global commodity prices provide some relief, the gains will be limited due to weakening of the Indian rupee. 

“We expect the monetary policy committee (MPC) to continue to frontload policy rate hikes especially as global monetary tightening continues. We expect 85-110bps of additional rate hikes in the coming few meetings to bring the Repo rate  towards 5.75-6% by the end of FY23,” said  Kotak Mahindra Bank chief economist Upasna Bhardwaj.

The ongoing war in Ukraine is keeping the global commodity prices high and the weakening rupee is keeping inflation high. The rupee plunged to close at a lifetime low of 79.60 against the US dollar on Tuesday.

The marginal drop in inflation in June is attributed to recent cuts in excise duty on petrol and diesel, in addition to restrictions imposed on food exports.

In June 2022, inflation in the food basket dropped to 7.75% in June compared to 7.97% in May, the National Statistical Office (NSO) data showed. The vegetable inflation rate eased to 17.37% from 18.26% in May. For ‘pulses and products’, it slowed to (-)1.02% against (-)0.42%.

The rate of price rise in ‘cereals and products’ inched up to 5.66% from 5.33%.

Inflation in the ‘fuel and light’ category rose to 10.39% in June compared to 9.54% a month ago.

According to State Bank of India’s economics cell, 200 out of the 299 commodities in the headline CPI basket could be categorised as supply-driven while the rest 99 is demand-driven.

“Our results show that supply side factors are currently responsible for almost two-third of the current elevated level of CPI inflation. This in part reflects supply constraints from continued global supply disruptions related to the pandemic and the war in Ukraine. Demand factors contribute only one-third to CPI inflation,” the report said.

Rising inflation is a matter of concern not just for the RBI but also for the government. “We will have to be mindful and watchful of the price movement. This pointed attack on inflation will need to continue,” Finance Minister Nirmala Sitharaman said on Tuesday.

CPI-based inflation had hit an eight-year high in April at 7.8%.

The RBI has raised the repo rate by 90 basis points in two tranches since May to control rising inflation. Further rate hikes are expected as inflationary headwinds remain.