India's inflation breaches target after more than a year, setting stage for rate hikes

By Shubham Batra

NEW DELHI, July 13 (Reuters) - India's ‌retail inflation breached the ​central ​bank's target for the first time in 17 months, government data showed on Monday, setting the stage for interest rate hikes in an economy at risk from a prolonged Middle ‌East conflict.

The consumer price index rose to 4.38% year-over-year in June, higher than the ⁠4.3% forecast in a Reuters poll.

Inflation was led by higher fuel and food costs, which rose amid Iran war-driven supply disruptions ‌and a delay in seasonal rains.

The ‌Reserve Bank of India, which targets inflation at 4% with a tolerance band of 2 percentage points on either side, had kept its policy rate unchanged in June but raised its inflation forecast, watching ​for knock-on impact from supply-driven pressures.

"We continue to hold the 2026/27 average CPI inflation forecast at 5.1%, with expectation of backloaded rate hike of 25-50 bps in the fiscal year," said Yuvika Singhal, ⁠economist at QuantEco Research.

India's fiscal year runs April through March.

State-owned fuel retailers raised prices four times in May, pushing up transport inflation to 4.31% ​in June, quicker than the 1.75% rise in the previous month.

India's federal government, in its monthly report released before the Middle East conflict escalated yet again, said ​that easing commodity prices, including crude oil and urea, may ‌help reduce imported inflationary pressures.

India is the world's third-largest crude importer and consumer.

While crude oil prices have fallen from the peaks of the Iran war, a flare-up ⁠in tensions in the Gulf has pushed them higher again.

India's food inflation accelerated to 5.32% in June from 4.78% in May, on the back of weak monsoon showers. Price pressures could reignite if El Nino disrupts crop production.

Inflation across most ⁠food items rose in July compared to June, suggesting that pressures from this category have yet to abate, Aditi Nayar, ​chief economist at rating agency ICRA, said.

The monsoon brings about 70% of India's annual rainfall and is critical for agriculture and rural incomes, with nearly half of farmland lacking irrigation and millions dependent on farming for their livelihood.

Core inflation in ‌June stood at 3.9%-4%, according to estimates by two economists.

RBI Governor Sanjay Malhotra has said that the central bank is watching for the second-round effects of higher ‌fuel and food prices before determining the trajectory of interest rates.

In an interview with local TV channel ET NOW ⁠in June, Malhotra said it would be ‌premature to talk about rate hikes ​as there were no signs of inflation becoming generalised.

The RBI has projected core inflation at 4.7% in the ongoing financial year.

(Reporting by Shubham Batra in New Delhi; Editing by ‌Mrigank Dhaniwala)

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