India's inflation soared to 5.8% in July

Here are 3 major culprits.

According to BBVA Research, India’s closely-watched wholesale price inflation jumped in July to a higher-than-expected 5.8% y/y (BBVA: 5.2%; consensus: 5.0%; prior 4.9%) led by upward energy price adjustments, rising food prices and the pass-thru of a weakening rupee.

Here's more:

Reassuringly, core inflation stayed benign at 2.3% y/y (from 2.1% y/y in June). The jump in headline WPI inflation, which reached a 5-month high, was influenced by the import pass-thru of a near 10% rupee depreciation during May-July, accentuated by a hike in regulated diesel prices (3% m/m) and a surge in prices of fruits and vegetables (10.5% m/m) amid temporary supply distortions from heavy rains.

Looking ahead we maintain expectations of average WPI inflation at 5.5% y/y over 2H13 as a bumper agricultural crop alleviates food price pressures going forward.

That said, the latest WPI complicates the Reserve Bank of India’s policy response amidst a worsening growth-inflation dynamic and external financing concerns.

We continue to expect another 25bp rate cut once the rupee stabilizes, although recent external pressures and today’s WPI outturn reduce the likelihood somewhat.

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