July inflation print did not cause any celebrations. Why it should have

The balance of risk around growth and inflation is shifting. Inflation risks are overstated, while emerging growth signals appear soft

India’s consumer price index (CPI) inflation dropped to a 59-month low of 3.5 per cent year-on-year (y-o-y) in July. Yet, this did not lead to any celebrations. The reasoning, according to the consensus view, is that the drop in inflation is due to base effects and that risks related to food inflation are tilted to the upside. Therefore, monetary policy cannot let its guard down, especially as growth is strong and there is a need to lower credit growth and narrow the credit-deposit growth gap.

We would push back against this consensus view for the following reasons.