Inflation in India falls to five-year low

Annual consumer price index (CPI) inflation in India fell from 5.08% in June to reach 3.54% in July – a five-year low and below the central bank’s 4% target.

The figures, published by the Ministry of Statistics and Programme Implementation on August 12, came a few days after the Reserve Bank of India (RBI) held its repurchase rate at 6.5%.

The RBI cited persistently high levels of food inflation as the reason for its decision. However, the figures released this week show food inflation slowed to 5.42% in July, down from 9.36% in June and the lowest level since the 4.49% recorded in June 2023.

Annual inflation in urban areas was 2.98% in July. Inflation in rural areas, where people tend to spend more of their incomes on food, was 4.1%.

Food prices came down across the board in July with declines noticed in vegetables, fruits and spices, the ministry said.

The RBI governor Shaktikanta Das said on August 7 that reliable rainfall and progress in sowing would help to ease food prices further.

The central bank estimated that headline inflation would average 4.5% in its current financial year, which ends next March.

Deepanshu Mohan, an economics professor at OP Jindal Global University and a visiting professor at the London School of Economics, says the drop in monthly food inflation could have been driven by a large base effect variation and monsoon rains, which tend to have a stabilising effect on food prices for urban consumers.

“The monsoon has been good,” he tells Central Banking. “Food inflation is inevitably determined by the distributive effects of monsoon rains.”