India's retail inflation remains above 7% in June, more rate hikes seen

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FILE PHOTO: A labourer pulls a handcart loaded with sacks of lentils at a grain market in Ahmedabad

By Manoj Kumar

NEW DELHI (Reuters) - India's annual consumer inflation remained painfully above the 7% mark and beyond the central bank's tolerance band for the sixth month in a row, official data showed on Tuesday, raising prospects of more rate hikes by central bank next month.

Economists said retail prices showed little sign of cooling despite the Reserve Bank of India (RBI) raising its benchmark repo rate by 90 basis points over the last two months and the government slapping export curbs on wheat and other food items.

June's print of 7.01% was almost in line with the 7.04% forecast by economists in a Reuters poll, and higher than 6.26% in the year earlier period, data released by the National Statistics Office showed on Tuesday.

A near 7% depreciation in the rupee against the dollar this year has pushed up prices of imported food and energy products for consumers.

Sakshi Gupta, an economist at private HDFC bank, said despite the fall in global crude and vegetable oil prices, inflation could remain close to 7% for the next two months before settling to 6%-7% range during the third quarter of the year.

"The RBI is likely to hike again by 25-35 bps in the August policy."

Graphic: India's retail inflation India's retail inflation-https://graphics.reuters.com/INDIA-INFLATION/lgvdwerblpo/chart.png

The RBI's Monetary Policy Committee (MPC) raised its benchmark repo rate by 50 basis points to 4.90% last month and hinted at more rate hikes to come.

The MPC will meet from Aug. 2-4 amid widely-held expectations of rate hikes of 25-50 basis points.

A Reuters poll showed India's inflation is expected to hold above the central bank's tolerance band for at least the rest of 2022, making several more interest rate hikes in coming months all but inevitable.

Core inflation, excluding volatile food and energy prices, was estimated at 5.96% to 6.2% in June, slightly lower than the previous month, said three economists, after the data release.

FEARS OF "TOO MUCH" TIGHTENING

Many policymakers hope that India is over the worst in terms of inflation after the central bank hiked rates and global commodity prices eased, while warning "too much" monetary tightening may hit the economy - recovering from two years of pandemic.

India remains one of the fastest-growing major economies, and growth is forecast to average 7.2% this fiscal year, lower than the 7.5% pace estimated previously.

Stock prices tumbled before the release of the inflation data. The benchmark NSE Nifty 50 index fell 0.97% on Tuesday, amid continued foreign portfolio outflows from domestic stock markets.

India's benchmark 10-year bond yield closed at 7.39%, down 4 basis points on the day.

Food inflation, which accounts for nearly half the CPI basket, rose 7.75% year on year in June, easing for the second month in a row.

Rupa Rege Nitsure, chief economist at L&T Financial Holdings, said upside risks to inflation remain in the form of monsoon-induced disruption for vegetables and fruit, as well as possible hikes in electricity tariffs by many states.

"(The) Monetary Policy Committee of RBI will take into account both the downside risks to growth and upside risks to inflation before deciding about the exact magnitude of the rate increase," Nitsure said.

(Additional reporting by Rama Venkat, Nallur Sethuraman and Chris Thomas in Bengaluru; Editing by Andrew Heavens, Kirsten Donovan and Raissa Kasolowsky)

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