Food inflation jumped to 5.52% and the Reserve Bank of India held at 5.25%: Why rate hikes are still on the table

India's Consumer Price Index (CPI) inflation rose to 4.45% year-on-year in July, up from 4.38% in June, largely due to increased food prices. While this marks the second month in a row that headline inflation has surpassed the Reserve Bank of India's (RBI) 4.0% target, it remains within the central bank's 2-6% tolerance range. Both MUFG and DBS Group Research agree that the RBI's decision to hold the repo rate at 5.25% is justified, but they differ on how long this pause will last.

According to MUFG's Michael Wan, the July CPI figure reinforces the view that domestic inflation is gradually increasing, primarily driven by food inflation, which reached 5.52% year-on-year from 5.32% in June. The bank warns that robust credit growth and strong domestic demand could eventually impact broader price categories. DBS Group Research, on the other hand, suggests that the RBI has sufficient room to maintain its current rate pause, citing subdued core inflation and low onshore bond yields as reasons.

Both institutions project an extended period of policy stability for the RBI at its 5.25% benchmark rate.