India’s Retail Inflation Drops to 1.55% in July

By Nikunj Ohri

NEW DELHI (Reuters) – India’s retail inflation dropped to 1.55% in July, slipping below the central bank’s comfort zone for the first time in eight years. This decline is attributed to falling food prices, especially vegetables and pulses, which have affected the incomes of some farmers.

Annual retail inflation slowed to 1.55% in July compared to 2.10% in June, and it was below a Reuters poll estimate of 1.76%. This figure is the lowest since June 2017 and is below the Reserve Bank of India (RBI)’s tolerance band of 2%–6%.

The RBI is mandated to keep inflation within a 2%–6% band and must provide an explanation to the government if it consistently breaches either end for three consecutive quarters. A drop below 2% indicates weak demand, which could hurt farm incomes and rural spending. However, it is unlikely to precipitate an immediate rate cut, as policymakers may interpret the decline as temporary and linked to volatile food prices.

Madan Sabnavis, chief economist at Bank of Baroda, commented that these inflation numbers align with expectations and indicated that their impact on the RBI’s policy decisions will be minimal. The central bank has already decreased its inflation forecast for the current financial year to 3.1% from an earlier 3.7%.

This drop in inflation comes just before U.S. President Donald Trump imposed an additional 25% tariff on India, raising duties on goods to 50%, one of the highest rates on U.S. trading partners. The Indian government estimates that about 55% of the country’s merchandise exports to the United States will be subjected to these tariffs. Economists anticipate that the low inflation rate and growth impact from these tariffs may provide room for another rate cut.

Sujan Hajra, chief economist at Anand Rathi Group, noted that the RBI’s already lowered 12-month forecast may be underestimated, increasing the likelihood of further rate cuts, especially given that U.S. tariffs could reduce GDP growth by 30–40 basis points.

Food prices have been the main contributor to the significant drop in inflation over the past eight months. Prices in July decreased by 1.76%, compared to a revised 1.01% drop in June. Specifically, vegetable prices fell by 20.69%, compared to a 19% year-on-year drop in June, while prices of pulses declined by 13.76% compared to a 12% fall in the previous month.

Despite the downward trend in food inflation negatively impacting farmers, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, stated that higher real rural wages, favorable summer sowing, and expected robust crop arrivals should mitigate the negative effects.

On a month-on-month basis, vegetable prices increased, while the price of pulses continued to decline. India Ratings and Research expects retail inflation to rise to 2.1% in August due to rising prices of certain vegetables, such as tomatoes.

Core inflation, which excludes volatile items such as food and energy, was recorded at 4%-4.12% in July compared to 4.4%-4.5% in the previous month, according to two economists. India’s official statistics agency does not publish core inflation data.