India's June CPI surged year-on-year to 4.38%, surpassing the 4% official target for the first time in 17 months.

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In June, inflation in India once again exceeded the Reserve Bank of India's 4% policy target, ending the previous trend of consecutive months of moderation. A rebound in food prices, rising international oil prices, and uneven distribution of monsoon rainfall jointly pushed up the price level, tempering market expectations for further monetary easing by the Indian central bank.

On July 13, data released by the Ministry of Statistics and Programme Implementation showed that India's CPI in June rose 4.38% year-on-year, higher than the market expectation of 4.20% and also above May's 3.93%, marking the first return above the Reserve Bank of India's 4% inflation target in nearly 17 months. After the data release, India's 10-year government bond yield rose by about 2 basis points to 6.73%, with the overall market reaction remaining relatively calm.

This inflationary rise exceeded expectations, but the market generally believes it is not enough to change the central bank's policy stance. However, against the backdrop of a renewed rise in inflation, market bets on subsequent rate cuts have moderated.

Food price leads the rebound; oil prices and monsoon are key variables for future inflation

Food prices remain the main driver of this round of inflation rise in India. As food accounts for about 37% of the CPI basket, June's food inflation rose to 5.32% year-on-year from 4.78% in May, becoming the largest contributor to the overall inflation rebound.

Meanwhile, energy prices are also adding upward pressure. Recently, tensions in the Middle East have risen again, pushing international oil prices higher. Concerns about the security of shipping through the Strait of Hormuz have resurfaced, with Brent crude prices once approaching $80 per barrel. Given India's heavy dependence on crude oil imports, rising oil prices will further push up fuel and transportation costs, and gradually pass through to end-consumer prices.

Besides international oil prices, the distribution of monsoon rainfall remains a key variable for food prices in the coming months. The southwest monsoon directly affects the majority of crop production in India. Although the national cumulative rainfall shortfall has narrowed from about 40% at the end of June to about 18% on July 12 and has generally improved, regional distribution remains uneven. Further developments in rainfall still need to be monitored closely.

Alexandra Hermann Prasad, Chief Economist at Oxford Economics, expects India's inflation to rise further in the coming months.

Market expects the Reserve Bank of India to stand pat in the short term

Although inflation has risen above the policy target again, analysts generally believe that a single month's data is not enough for the Reserve Bank of India to adjust monetary policy.

At its June policy meeting, the Reserve Bank of India kept its benchmark rate unchanged at 5.25% and raised its inflation forecast for the 2026/27 fiscal year to 5.1%, already leaving room for possible price increases. RBI Governor Sanjay Malhotra said at the time that the central bank would only respond with policy adjustments if pricing pressures spread more broadly, and that it would continue to monitor international oil prices and the progress of the monsoon.

Aditi Nayar, Chief Economist at ICRA, stated that she still expects the Reserve Bank of India to keep rates unchanged at the August policy meeting. She believes that a retreat in oil prices would reduce the need for early policy tightening, but renewed tensions in the Middle East remain a major inflation risk going forward.

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