Fiscal irresponsibility, inflation and rising interest rates are combining to create headaches for central bankers who are left having to shape monetary policy in such a way that leaves policymakers, the public and commercial communities unsatisfied.
India is just the latest example. India’s consumer price index accelerated in July, climbing to 4.45% on an annual basis and exceeding the Reserve Bank of India’s 4% medium-term target for a second straight month.
But the increase, as with the June CPI data for India, was a supply-driven price squeeze rather than a demand-side one, suggesting that the central bank will look through the recent gains and hold rates steady when it meets in October.
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The primary drivers of July’s increase in India’s CPI were food and beverages, which rose by more than double the increase in the all-items index, as a weak and unevenly distributed monsoon delayed sowing in several states.
Transport, which drove much of June’s acceleration, cooled sharply in July. That may look like the West Asia-linked fuel shock is fading, but transport prices in July still surged compared to the same time last year.
Restaurants and accommodation services showed the same pattern. Compared to a year ago, restaurant and hotel prices are the second-fastest rising category.
Since the cost of liquefied petroleum gas feeds directly into menu and room pricing, fuel-driven pressure from the conflict in the Middle East is still showing up in the annual numbers even as its month-to-month contribution fades.
Food’s monthly acceleration points to lingering supply-chain and monsoon-timing effects, while the fuel cost shock is driving the annual transport and restaurant prices.
Looking ahead, we expect CPI to hold in a similar range before easing later in the year. Our base case is for inflation to average around 5% through 2026-27, in line with the central bank’s own revised forecast.
As a result, the Monetary Policy Committee will most likely hold its policy rate steady at the Oct. 7 meeting, opting to look through July’s numbers as a continuation of the supply-side story rather than grounds for a policy shift.
Looking ahead
- CPI outlook: We expect inflation to hold in a similar range over the next two to three months before easing later in the fiscal year. Our base case is for CPI to average close to 5% through 2026-27, in line with the RBI’s own revised forecast.
- Monetary policy: With the RBI itself now projecting a Q3 FY27 peak followed by moderation, we expect the central bank to deliver one 25-bps cut later this fiscal year, most plausibly at the December or February review.
