India's retail inflation rose to a 15-month high of 7.44% in July, up from 4.81% in June, led by a rise in prices of vegetables, cereals, pulses, spices and milk and products, data released by the National Statistical Office (NSO) on Monday suggest. 

Higher vegetable and cereal prices pushed up inflation at the wholesale level as well, with the wholesale price index (WPI) based inflation rising to (-)1.36% in July from (-)4.12% in June. However, on an annual basis, WPI inflation remains in the deflationary zone for the fourth consecutive month. 

The prime reason behind the sharp spike in July inflation was food prices. The food inflation rate rose to 7.75% in July from 1.24% in June. Vegetable prices rose by 26.96% in July, the highest in 10 years. Other major contributors to inflation in July were oils and fats (10.53%), meat and fish (7.87%), and minerals and metals (4.61%), cereals (13.23%), fruits (10.63%), and milk (9.41%). In addition to food prices, inflation in July was also driven by higher prices for non-food items such as clothing (8.03%), fuel and light (9.53%), and transport (8.28%). 

The sharp rise in inflation in July is a matter of concern for the central bank. RBI has been trying to control inflation by increasing interest rates. However, the July inflation data suggests that the RBI's efforts do not yet have the desired effect. 

This is for the third time in this calendar year India's retail inflation rate crossed the upper limit of the 2%-6% tolerance band set by the Reserve Bank of India for its medium-term inflation target. The central bank mainly considers retail inflation while deciding on the benchmark interest rate (repo rate). 

RBI kept the repo rate unchanged at 6.9% in its latest monetary policy review last week. Although the Monetary Policy Committe (MPC) retained the policy stance as ‘withdrawal of accommodation’, it hiked the inflation projection for the current financial year to 5.4% from 5.1% earlier in the wake of high food inflation. This means a rate cut is unlikely this year. 

While a rate cut in the next year looks highly unlikely, some economists suggest that if inflation does not fall below the 6% mark soon, another 25 basis points hike in rapo rate could be a distant possibility. According to Madan Sabnavis, Chief Economist at Bank of Baroda, the MPC will not just monitor the CPI number but also keep track of the factors driving it up. Hence a rate hike cannot be ruled out for certain though the probability is low. 

Given the backdrop, it is going to be challenging for the RBI to create a balance between growth and inflation.

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