Retail inflation falls to 6.71% in July, but RBI just 2 months away from likely failure

India's headline retail inflation rate, as measured by the Consumer Price Index (CPI), fell to a five-month low of 6.71 percent in July, according to data released on August 12 by the Ministry of Statistics and Programme Implementation.

In June, CPI inflation had come in at 7.01 percent.

At 6.71 percent, the July CPI inflation figure is in line with the consensus estimate. As per a Moneycontrol poll, CPI inflation was seen falling to 6.7 percent in July.

Even though inflation fell to a five-month low in July, it has now spent 34 consecutive months above the Reserve Bank of India's (RBI) medium-term target of 4 percent and seven straight months outside the central bank's 2-6 percent tolerance range.

As such, the central bank is only two months away from failing to meet its inflation mandate, which is deemed to occur when average inflation is outside the 2-6 percent tolerance range for three consecutive quarters.

CPI inflation averaged 6.3 percent in January-March and 7.3 percent in April-June. For inflation to average 6 percent or lower in July-September, it cannot exceed 5.7 percent in both August and September.

As per the RBI's own forecast, CPI inflation is expected to average 7.1 percent in July-September. This means CPI data for September, scheduled to be released in mid-October, will likely show the RBI has failed.

In the event the RBI fails, it is required to submit a report to the central government detailing the reasons for failure, the steps it plans to take to return inflation to target, and how long it thinks it would take for inflation to return to the target.