Indian headline inflation decelerates year-on-year in July

Indian headline inflation eased for the first time in six months in July on a year-on-year basis, coming in at 3.15 percent. On a sequential basis, the headline inflation accelerated to 0.91 percent in July from June’s 0.63 percent.

Food price inflation continued to be more or less at June levels. The fuel component eased considerably, coming in at 0.36 percent year-on-year, in spite of the rise in taxes on petrol and diesel, as prices of LPG fell 4.55 percent year-on-year in the month.

In spite of core inflation picking up for the first time since October 2018, overall demand pressures continue to be soft. The rise in taxes on fuels in July appears to have made their way to the transport category. Barring specific categories that added to the rise, core inflation continues to be widely benign.

“We continue to expect core pressures to remain on the weaker side for the rest of the year, as reflected in persistent sluggishness in high frequency consumption indicators, led by auto sales”, said ANZ in a research report.

Subdued demand strengthens the view that inflation is set to be below the Reserve Bank of India’s medium-term target of 4 percent for the remainder of 2019.

“This warrants additional monetary policy easing in our view, especially given output gap has widened (we estimate it at -0.7 percent of GDP for Q2 2019). We are calling for an additional 50bp worth of cuts for the remainder of this year”, added ANZ.