India’s risk free 10Y yield continues to retreat, tracking moderation in oil prices as well as easing US yields since late last week. Adding to the risk-on mood were signs that domestic inflation has peaked and is likely to gradually decelerate over the rest of the fiscal year. Oct CPI inflation eased to 6.77% yoy from 7.4% in Sep, in line with our forecast, driven by a low base. Undercurrents were stickier with food inflation rising month-on-month as unseasonal rains hurt output and lagged impact of high transportation costs pushed up prices of perishables, particularly vegetables, besides cereals as well as protein pressures. Housing, fuel & light (electricity, non-subsidised variants) and service segments (transportation and personal care) also rose vs month before, keeping core inflation (ex-food, fuel) elevated at 6% due to lagged follow through of higher input prices. November inflation is expected to ease to 6.4-6.6%. Separately, Oct WPI inflation eased to 8.4% yoy, after over 18 months of double-digit rise on ebbing tradable pressures.
Speaking at an event over the weekend, RBI Governor Das signalled that inflation remained a concern, as prints stay above the 2-6% range over the next couple of months, but are expected to ease back into the range in 1Q23. Signs of a peak in inflation, and lower incremental depreciation pressures on the currency, increases the likelihood that the RBI might dial down the scale of the hike in December to 35bp, after three consecutive 50bp increases, and the tightening cycle to peak in early 2033, ahead of the US Fed. We will watch the policy communication closely as views of the policy committee members diverge on the path ahead.
Plans are afoot for India to issue its maiden sovereign rupee-denominated green bond worth INR160bn (~$2bn) in the Mar23 quarter. According to the framework, proceeds will be channelled into renewables (except big hydro), water and waste management as well as clean transportation projects, with project-related risks to the borne by the issuing authority. Pricing and tenor details have not been made available, but the debut issue is expected to receive some pricing benefit based on the intended use of the proceeds vs regular borrowings.
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