Food prices on the rise, domestic demand keeps economy strong

India has seen a widespread rise in food prices while the southwest monsoon's revival lessens some risks for the farming industry, according to the Reserve Bank of India's monthly economic update. The overall economy remains robust, driven by growing domestic demand, despite warnings from global economic uncertainties caused by renewed tensions in the Middle East and new US tariffs.

RBI officials have been particularly cautious about broad-based inflation, as it could trigger tighter monetary policy. The headline inflation, as measured by the Consumer Price Index, stayed above the 4% target - 4.5% in July and 4.4% in June - mainly due to supply issues. However, steady core inflation suggests that the costs are not significantly affecting everyday prices.

Strong economic activity and domestic demand were evident in the high-frequency indicators for July, with continued momentum in manufacturing and services, as well as a double-digit expansion in merchandise exports and imports. Yet, India's merchandise trade deficit widened in July due to an increase in electronic goods imports.

The oil deficit remained steady despite the Indian crude oil price reaching $89.7 per barrel, surpassing the June and July averages. Despite these challenges, India's solid macroeconomic fundamentals continue to support the domestic economy, according to the RBI report. The US has recently imposed an additional 10% tariff on Indian goods, which may impact bilateral trade.

However, India may face less severe consequences compared to some other Asian countries like China, Vietnam, and Thailand, which are subject to a 12.5% tariff. The financial sector witnessed high credit growth and lower government bond yields, supported by an increase in capital inflows.