India inflation may continue to rise in the near term, says OPEC

India?s inflation may continue to rise in the near term, OPEC stated in its monthly report. Headline CPI inflation remained above the RBI?s 4% target in July, rising to 4.5%, y-o-y, after 4.4%, y-o-y, in June, while food inflation increased to 5.5%, y-o-y. Price pressures remained stronger in rural areas, where headline inflation stood at 4.8%, compared with 4% in urban centres, reinforcing the importance of the monsoon and food-supply conditions for the near-term outlook, it said. The composition remains somewhat more reassuring than the headline figure, as underlying inflation excluding precious metals is still relatively subdued, but second-round effects remain the key risk, particularly through food prices, transport costs, fertiliser, logistics and services. Developments in August have pointed to ongoing challenges, however, as reservoir levels remain below last year?s levels in several regions. Reservoir storage is an important indicator to watch in this respect, since it determines both irrigation capacity for the sowing season and the buffer against deficient rainfall. Storage entering the season has been low, and a further shortfall would weigh on sowing decisions and rural demand. Against this backdrop, although the RBI kept the repo rate unchanged at 5.25% in August, its communication has become more cautious. Indeed, policymakers have left open the possibility of tightening later in the year if inflation pass-through broadens or expectations become less anchored, the oil cartel further noted.

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