India's consumer price index rose 1.55 percent on the year in June, dropping sharply from an increase of 2.10 percent in May. This takes headline inflation below the Reserve Bank of India's target range of two percent to six percent for the first time since 2019 and extends the substantial disinflation seen since the peak of 6.21 percent last October.

The move lower in headline inflation was driven by food prices, which have continued to weaken after spiked higher earlier in the year. Food and beverage prices fell 0.84 percent on the year, dropping more sharply from the 0.20 percent decline recorded previously, while fuel and light charges rose 2.67 percent on the year after a previous increase of 2.55 percent. Inflation in urban areas fell from 2.56 percent in June to 2.05 in July while inflation in rural areas slowed from 1.72 percent to 1.18 percent.

At the RBI's most recent policy meeting, held last week, officials left its benchmark repurchase rate on hold at 5.50 percent after lowering this rate by 100 basis points over the previous three meetings. In the statement accompanying last week's decision, officials advised that favourable weather conditions will likely further reduce food inflation pressures and lowered their inflation forecasts for this fiscal year from 3.7 percent to 3.1 percent. The fall in inflation reported today therefore will come as no surprise to officials and will likely have a limited impact on their assessment of the policy outlook. They also announced at their meeting last week that they will retain the policy stance as"neutral as they consider incoming data.

Inflation remains muted with the consensus looking for 1.6 percent in July, down from 2.10 percent in June.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.