Inflation in India accelerated in June, rising by 4.4% on an annual basis, above the 3.9% in May and exceeding the Reserve Bank of India’s 4% medium-term target for the first time in 17 months.
The increase in the consumer price index was another way that the global energy shock set off by the war in Iran continues to take a toll on India’s economy.
Food and transport led the gains as high oil prices were passed through to the gas pump.
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Transport alone rose by 2.6% on the month, the biggest monthly gain of any category and exceeding the all-items category by roughly 2.6 times.
Looking ahead, we expect the CPI to increase further before it eases, as the monsoon season puts upward pressure on food prices. Our base case is for inflation to average around 5% through the first half of next year.
As a result, the Reserve Bank of India will most likely enter a wait-and-see mode. The central bank’s Monetary Policy Committee will most likely hold its policy rate steady at its August meeting from Aug. 3 to Aug. 5 as it assesses how durable the inflation increase will be.
June’s CPI increase was a classic case of a supply-driven price squeeze, as escalating geopolitical tensions in West Asia lifted crude and freight costs, which fed into domestic fuel and transport pricing with the typical one-to-two-month lag. This regional risk premium is likely to persist, which will keep inflation elevated.
- Food and beverages rose by 1.6% on the month and remain the largest single contributor on an annual basis. Food’s share of the 4.4% headline figure widened has steadily from January through June. The proximate driver is uneven and delayed monsoon progress.
- Other categories contributed to the increase. Education rose by 1.2% on the month, restaurants by 1.4%, and household goods and clothing each by 0.5%. That breadth showed that costs were moving up in personal care, dining out, and durables, not just the volatile components of food and energy.
Looking ahead
- CPI outlook: Assuming June’s momentum in transport and food only partially unwinds, we expect headline CPI to average close to 5% through the first half of next year.
- Monetary policy: We don’t expect the June number to force a hike in the August meeting. The CPI increase was driven byt supply-side and geopolitical factors rather than demand overheating. For this reason, we think the central bank will wait for another month or two of data before it makes a decision.
- Durability: The services repricing we flagged in restaurants and education is the variable to watch. If that spreads into a third or fourth core-adjacent category over the next one to two prints, it would mark the transition from a supply-shock story to a stickier inflation problem.
- Upside risk to our 5% call: A poor monsoon distribution in the July–August window or a further escalation in West Asia that keeps crude and freight costs elevated could push the average toward 5.5% or 6%, which would bring an earlier RBI response back into the conversation.
- Downside risk to our 5% call: If the monsoon normalizes and crude eases from current levels, food and transport could both roll over quickly given how much of the June acceleration is concentrated in those two categories, in which case inflation could settle back toward the 4% to 4.5% range by the second quarter next year, and the case for holding through year-end strengthens further.
