India's inflation soared to 5.8% in July
Here are 3 major culprits.
According to BBVA Research, India’s closely-watched wholesale price inflation jumped in July to a higher-than-expected 5.8% y/y (BBVA: 5.2%; consensus: 5.0%; prior 4.9%) led by upward energy price adjustments, rising food prices and the pass-thru of a weakening rupee.
Here's more:
Reassuringly, core inflation stayed benign at 2.3% y/y (from 2.1% y/y in June). The jump in headline WPI inflation, which reached a 5-month high, was influenced by the import pass-thru of a near 10% rupee depreciation during May-July, accentuated by a hike in regulated diesel prices (3% m/m) and a surge in prices of fruits and vegetables (10.5% m/m) amid temporary supply distortions from heavy rains.
Looking ahead we maintain expectations of average WPI inflation at 5.5% y/y over 2H13 as a bumper agricultural crop alleviates food price pressures going forward.
That said, the latest WPI complicates the Reserve Bank of India’s policy response amidst a worsening growth-inflation dynamic and external financing concerns.
We continue to expect another 25bp rate cut once the rupee stabilizes, although recent external pressures and today’s WPI outturn reduce the likelihood somewhat.