The Inflation Situation
India's retail inflation, measured by the Consumer Price Index (CPI), edged up to 4.45% in July, marking a 19-month high. This was the second month in a row that inflation remained above the Reserve Bank of India's (RBI) 4% target, though still within
its 2-6% tolerance band. The main driver was rising food prices, with the Consumer Food Price Index (CFPI) climbing to 5.52%. This pressure was felt more in rural areas, which saw food inflation at 5.79%, compared to 5.05% in urban centres. While prices for some vegetables like potatoes and tomatoes eased, staples such as ginger and garlic saw sharp increases. Economists expect inflation to harden further in the coming months due to base effects and potential impacts from an intensifying El Nino on crops.
Oil's Volatile Influence
Global crude oil prices are a major variable for the Indian economy, which imports the vast majority of its oil needs. Recently, Brent crude prices climbed toward $96 per barrel, marking a significant weekly gain due to geopolitical tensions in the Middle East. Every $10 increase in the price of a barrel of crude has a tangible impact on India's current account deficit. While the government has previously stated that the macroeconomic impact is manageable as long as prices stay below $90 per barrel, a sustained period above this level could strain the economy. Higher oil prices affect everything from household budgets via petrol and diesel costs to the operational expenses of businesses, potentially feeding into broader inflation.
A Tale of Two Sectors: Manufacturing and Services
Recent data from the Purchasing Managers' Index (PMI) paints a contrasting picture of India's two major sectors. The manufacturing sector showed signs of cooling, with the PMI falling to 52.8 in August, its weakest expansion in five years. This slowdown was linked to a moderation in new orders and output. In stark contrast, the services sector gained momentum, with its PMI rising to 54.1 in August from 53.3 in July. This growth in services was strong enough to offset the manufacturing slowdown, keeping the overall Composite PMI steady at 54.3. A particularly bright spot in the services data was a significant boost in hiring, which reached a 15-month high.
Growth, the Rupee, and the RBI's Stance
Despite some headwinds, the economy showed surprising resilience, with GDP growing 7.8% in the April-June quarter, beating the RBI's projection. This strong performance was broad-based, with services and investment leading the way. Meanwhile, the Indian Rupee has seen some volatility. After strengthening due to foreign currency inflows, it has faced pressure from a strong US dollar and rising oil prices, with the exchange rate hovering around ₹94.5 to the dollar. Given the mixed signals—robust growth but persistent inflation and external risks—the RBI has maintained a cautious stance. It kept the key repo rate unchanged at 5.25% in its August meeting and revised its full-year inflation forecast down slightly to 5%.
