India's inflation rate has now increased for nine consecutive months, reaching 4.45% in July, up from 4.38% in June. This rise strengthens the likelihood of the Reserve Bank of India (RBI) raising interest rates, especially as food inflation surged by 5.5% and transport-related inflation exceeded 7%.
Although the inflation figure fell short of economists' predictions of 4.50%, it still exceeds the RBI's target of 4%. The central bank has maintained its benchmark interest rates, unlike many Asian counterparts that have raised rates to combat inflation driven by global energy supply chain disruptions linked to the ongoing Iran war.
With India importing approximately 85% of its fuel needs, the country is particularly susceptible to these supply issues. Recent geopolitical tensions have pushed global oil prices to around $90 per barrel, further complicating the inflation landscape. Sanjay Malhotra, the RBI governor, noted that while headline inflation is above target, core inflation remains moderate.
The RBI anticipates that inflation will peak in the December quarter, prompting expectations of rate hikes beginning in December, with Morgan Stanley projecting a cumulative increase of 75 basis points, bringing the policy rate to 6.0%.
The brokerage also forecasts an average headline inflation of 5% for the financial year ending March 2027, driven by persistent food inflation and rising input costs