December CPI inflation remained at benign levels despite bottoming out from month before; a new rebased reweighted series is due for release in February. CPI inflation rose 1.3% yoy, below expectations of 1.5-1.6% yoy, but marking an increase from 0.7% yoy month before. Inflation bounced off lows as favourable base effects diminished, and precious metals firmed up. Food disinflation persisted for the seventh consecutive month at -2.7% yoy, but easing from -3.9% in Nov. Core inflation quickened to 4.6%yoy from 4.3% month in Nov due to higher precious metals, excluding which the core core print (core except precious metals) was benign at 2.7% yoy. While off its back, the still benign headline number points to slack in the economy. We note that this is the last reading under the older 2012 base, with January 2026’s print (out on February 12) to reflect the new 2024 base year. Under the existing base, hike in tobacco/ cigarette taxes, and gold, besides modest upside in food would have added to the upward momentum in 1Q26 (4QFY26), besides adverse base effects. The RBI policy committee lowered rates in Dec, along our expectations, but is expected to draw a pause when they meet next in February. Separately, we expect the RBI to retain its inflation targeting framework and parameters at the upcoming review (Inflation targeting – still FIT for purpose?).
INR GSecs received a breather with the 10Y yield within familiar range of 6.60-6.65% this week, likely benefiting from the replacement demand from the recently conducted open market operation. Expectations are that another one or two tranches of OMOs and FX swaps are in the pipeline to compensate for the liquidity drain due to the FX intervention, besides seasonal leakage factors. Separately, investors are eyeing another catalyst to boost demand for INR securities, ahead of the budget, via a potential inclusion into the Bloomberg Global Aggregate Index. We had noted in Bonds await support, tariff relief steps, that an update might be provided in January. Eligible FAR securities are already a part of the Bloomberg Emerging Market Local Currency Government Index, with the weightage increased in a phased manner. While any favourable announcement in this regard will cap yields, price action is likely to return to familiar ranges if onshore investors remain unconvinced; range of 6.55-6.65% is likely to hold in the near-term. Separately, the US’ imposed a 25% tariff on any nation doing business with Iran. For India, the scale of total trade with Iran was very small, narrowing sharply since 2018-19 following broader global restrictions. India’s key exports to the country include cereals, coffee, pharma, fruits, nuclear reactors etc., while purchases comprise mineral fuels, edible fruits, glass, earth/ cement etc. It will be important to establish the timeline by when this tariff rate will be effective and whether this will be an additive layer to allow trading partners to scale back.
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