Citing the sharp rise in food prices, economists at a foreign bank have forecast a steeply higher retail inflation print for July, pegging it at 6.7 percent, up 190 basis points from the previous month.

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Deutsche Bank India economists led by chief economist Kaushik Das, in a report on Monday ahead of the monthly inflation print and the Reserve Bank’s monetary policy review, said that the July consumer price-based inflation index (CPI) is likely to print at 6.7 percent on-year as against 4.8 percent in June.

The Reserve Bank is widely believed to leave the key interest rates unchanged for the fourth time in its upcoming bi-monthly monetary policy decision on August 10.

The last repo rate hike was in December 2022, when the central bank raised the rate by a quarter percentage point, taking it to a near decadal high of 6.50 percent.

The massive spike seen is due to food prices, led by tomatoes and onions and also rice shooting over the roof in July with daily prices of 22 essential food items going up 12.3 percent on-month on an average as against 2.4 percent rise in June.

Among key vegetables, prices of tomatoes went up 236.1 percent in June against 38 percent hike witnessed in June, while rate of onions rose 15.8 percent compared to 4.2 percent increase in the preceding month and potato price climbed by 9.3 percent in July against a 5.7 percent hike in June.

Overall, prices of tomatoes, onions and potatoes have increased 87.1 percent in July as against 16 percent rise in June.

”Given these factors we see headline CPI inflation increasing 2.3 percent on-month in July versus 1 percent on-month in June to 6.7 percent in July,” they said.

Factoring in all the idiosyncrasies related to food inflation, the economists have also revised up July-September CPI forecast to 5.8 percent average (from 5.2 percent earlier), but also lowered the Q3 and Q4 FY24 forecasts to 5.3 percent and 5.2 percent average, respectively from 5.6 percent and 5.4 percent earlier, resulting in an unchanged CPI forecast of 5.2 percent for FY24.

The RBI’s current inflation forecast is 5.2 percent for Q2, 5.4 percent for Q3 and 5.2 percent for Q4.

The RBI will have to revise up its CPI forecast for Q2, which will probably result in the FY24 full-year forecast rising slightly to 5.2 percent from the current forecast of 5.1 percent, the report said.

The price pressure, however, should sequentially come down from August, but the bigger disinflation in vegetable prices will probably be seen from September. Consequently, retail inflation may stay around 6 percent in August as well, after which it may moderate to 4.8 percent in September on the back of falling vegetable prices, particularly those of tomatoes, the report said.

While tomato prices, which have crossed Rs 300 a kg in Delhi despite the government selling it at subsidised rates, will likely ease meaningfully only from September, but then there is a risk of cereals going up, particularly rice, which hopefully will not rise as much as it did in August and September of 2022.

”Based on our current forecasts, we expect CPI inflation to average around 5.8 percent in July-September of this year,” the report said.

However, the report noted that the silver lining is in core CPI, which is likely to print in lower at 5 percent in July.