India’s inflation is likely to remain elevated in the near term, according to OPEC’s monthly report. Headline CPI inflation stayed above the RBI’s 4% target in July, rising to 4.5% y-o-y from 4.4% in June, while food inflation increased to 5.5% y-o-y. Price pressures were more pronounced in rural areas, with headline inflation at 4.8%, compared with 4% in urban centres. This highlights the importance of monsoon conditions and food supply dynamics for the near-term inflation outlook, OPEC noted.

The underlying composition of inflation remains relatively reassuring, with core inflation excluding precious metals still subdued. However, the key risk lies in potential second-round effects, particularly through food prices, transportation costs, fertilisers, logistics and services.

Developments in August have highlighted continued challenges, with reservoir levels remaining below those recorded last year across several regions. Reservoir storage will be an important indicator to monitor, as it influences irrigation availability during the sowing season as well as the buffer against inadequate rainfall. With storage levels entering the season already low, any further shortfall could weigh on sowing decisions and, consequently, rural demand.

Against this backdrop, the RBI kept the repo rate unchanged at 5.25% in August, although its communication has turned more cautious. Policymakers have kept open the possibility of raising rates later in the year should inflationary pressures broaden or inflation expectations become less anchored, OPEC further noted.