On Our Minds July CPI Case for pre emptive tightening is strengthening

On Our Minds July CPI: Case for pre-emptive tightening is strengthening • Headline inflation is becoming less benign: July CPI rose to a 19-month high of Kunal Kundu % yoy, remaining above the RBI’s 4% target for a second month despite a significantly high statistical base effect. • Food remains the immediate pressure point: Food inflation accelerated to 5.52%, while strong sequential gains risk lifting household inflation expectations and triggering second-round effects during the festival season. • Price pressures are beginning to broaden: Core momentum is running at an estimated 4.3% on a three-month annualised basis, while the number of CPI items recording monthly price increases rose from 236 in February to 320 in July. • Input-cost pass-through is delayed, not absent: Weak pricing power has encouraged firms to absorb higher costs through margins, but elevated WPI inflation and corporate price-hike signals point to a gradual transmission into consumer prices. • The 2022 experience argues against complacency: Although current conditions are less severe, waiting for supply-driven inflation to become broad-based risks requiring sharper catch-up tightening later. Firm money-market rates and a narrow India-US yield spread further constrain the RBI’s room to remain dovish. • We expect a conditional, shallow tightening cycle: Our base case is a 25bp hike in December, followed by another in February or April 2027, provided food inflation remains elevated, core momentum stays firm, and corporate price resets broaden. Faster food disinflation, softer commodity costs or limited pass-through could extend the pause.

Headline inflation understates the emerging pressure India’s headline CPI inflation rose to a 19-month high of 4.45% yoy in July, from 4.38% in June. Inflation remained above the RBI’s median target of 4.0% for a second consecutive month and increased despite a high statistical base, signalling that near-term price pressures are proving more persistent than the year-on-year rate alone suggests. Food inflation climbed to 5.52% from 5.32% in June, led by sharp increases in onion, garlic and ginger prices. Sequential momentum was considerably stronger: the overall CPI index rose by around 0.9% month-on-month, while the food price index increased by about 2.1%.

Household inflation expectations are likely to rise even higher Unconcerned by the trajectory of crude prices, petrochemical as food prices continue to climb prices remain sharply elevated % Inflation expectation - 3 months ahead Change in price (% pre-conflict level) 13 70

Source: SG Cross Asset Research/Economics, CEIC, RBI, PPAC, EIA

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Persistent food inflation is likely to push household inflation expectations higher. Food carries a large weight in household consumption and disproportionately influences perceived inflation. If food prices remain elevated into the festival season, they could affect wage demands, discretionary spending and corporate pricing behaviour, raising the risk of second-round effects.

Core inflation eased marginally in July, offering limited near-term comfort. However, our estimate of the three-month-on-three-month annualised rate, at around 4.3%, suggests that underlying momentum is firmer than conventional year-on-year measures imply. Persistent food inflation and strengthening short-term core momentum make the July print less benign than the headline rate suggests.

Persistently higher goods prices (beyond RBI’s upper tolerance Services inflation, prime reason for core inflation remaining limit) indicate broad basing of inflation contained, starting to rise meaningfully Goods % yoy Services 10 7.5

Source: SG Cross Asset Research/Economics, CEIC

Pass-through is slow, not absent

The July outcome contrasts with the relatively dovish tone of the August MPC meeting. Despite acknowledging risks from volatile energy prices, uneven rainfall and the second-round effects of higher food and input costs, the RBI kept the repo rate unchanged at 5.25%, retained its neutral stance, and lowered its FY27 inflation projection to 5.0%…