India's retail inflation jumped to 7.44% year-on-year in July from 4.87% in June, breaching the Reserve Bank of India's 6% upper tolerance limit, according to official data released by the Ministry of Statistics & Programme Implementation.

Inflation measured by the Consumer Price Index (CPI) rose to 7.63% in rural areas in July from 4.78% in June. Inflation in urban areas increased to 7.20% in July from 4.96% in the previous month.

The consumer food price index (CFPI) rose to 11.51% from 4.49% in June. The inflation rate for vegetables surged 37.34% in July compared with 0.93% contraction in June. Retail inflation in cereals increased by 13.04% in July as against 12.71% in the previous month.

Spices witnessed 21.63% inflation in July while pulses saw a 13.27% increase in prices. Milk and milk products witnessed 8.34% inflation in July.

This comes days after Reserve Bank of India governor Shaktikanta Das cautioned that a substantial increase in headline inflation would occur in the near term led by a spike in prices of tomato, cereals and pulses.

Edible oils and fats, however, saw a decrease in prices. Inflation rate of edible oil contracted 16.8% in July.

Fuel and light inflation further moderated to 3.67% in July from 3.92% in June. The inflation rate for clothing and footwear came down to 5.64% in July from 6.19% in March.

"The month of July has witnessed accentuation of food inflation, primarily on account of vegetables. The spike in tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near term," Das said while reading the monetary policy statement.

While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far, the RBI governor said.

The monetary policy committee raised its CPI inflation forecast for 2023-24 to 5.4% from 5.1% earlier. The MPC expects retail inflation in Q2 FY24 at 6.2%, Q3 at 5.7% and Q4 at 5.2%. CPI inflation for Q1 FY25 is projected at 5.2%.

"Headline inflation projection for Q2 of 2023-24 has been revised up substantially, primarily due to the price shock from vegetables. Given the likely short-term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time," Das said.

India's industrial output growth falls to 3.7% in June

India's industrial production grew by 3.7% in June compared with 12.6% in the same month last year, according to data released by the Ministry of Statistics and Programme Implementation. The index of industrial production (IIP) had risen to 5.2% in May 2023 from 4.5% in April.

The manufacturing sector's output rose 3.1% in June compared with 5.7% in May. The mining sector witnessed 7.6% jump in production while the electricity sector saw 4.2% increase in output in June. Primary goods clocked a growth rate of 5.2% in June as against 3.5% in May. The capital goods sector registered a growth of 2.2% in June as against 8.2% in May.

"The year-on-year (YoY) growth in the Index of Industrial Production (IIP) slowed to a weaker-than-expected 3.7% in June 2023 from the revised 5.3% in May 2023, in contrast with the sharp rise in the core sector output growth between these months," notes credit rating agency ICRA.

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