Consumer inflation continued its downward trajectory, printing 6.7% in July. Although inflation appears to have peaked now, and there are some positive developments on the crude oil and commodity price fronts, it's a bit early to uncork the bubbly for three reasons:

• Monsoon, though normal at an all-India level, has been deficient in some of the prominent rice growing regions. This has pushed up rice inflation and creates risks for inflation in fruits and vegetables as well, the most volatile component of consumer inflation. This comes on the back of a heat wave earlier this year having already affected wheat production
  
• Global crude oil and commodity prices have remained above last year's levels even after the recent softening, and there is pressure to pass on the high input costs to the end-consumers. This has translated into a sticky core inflation
  
• With the revival in contact-based services, the pressure on services inflation continues
  

The caution on inflation was reflected in the Reserve Bank of India's (RBI) August monetary policy announcement. Although retail inflation undershot the RBI's first quarter estimate by 20 basis points (bps), it kept the fiscal year forecast unchanged at 6.7% and reiterated that inflation in India was still at an unacceptably high level. This prognosis was reflected in the RBI raising interest rates by a full 50 bps against expectation of 35 bps by several market participants – repo rate at 5.4% is now 25 bps above the pre-pandemic level. CRISIL's Financial Conditions Index (FCI) shows that financial conditions have continued to tighten since October 2021 and are currently tighter than the average of the last decade. This is a combined result of monetary tightening by systemically important central banks, spill-over effects of the Russia-Ukraine conflict, and reduction in surplus liquidity and rate hikes by the RBI.