India’s January CPI posted an upside surprise, rising 6.5% yoy from 5.7% in Dec22, back above the upper end of the inflation target band. Food accounted for almost all of the increase in the headline print, based on contribution, punching well above its weight. Double digit yoy rise in cereals, and other non-perishable protein sources were responsible for bulk of the lift. Prevailing mandi prices suggest that cereals like wheat, for instance, continues to trade well above its minimum support prices, notwithstanding administrative measures like allowing flour millers to buy additional stocks from the state’s reserves. Remnant pass through of input prices in goods and seasonal jump in the housing, amongst others, left the core print (ex food and fuel), at an elevated 6.1% yoy, higher than the average six-months prior. Rural inflation continues to outpace the urban counterpart, rising 6.9% yoy vs 6% respectively. Evolving 1Q23 (4QFY) CPI trend poses at least 40-60bp upside risk to the revised RBI monetary policy committee (MPC) forecast of 5.7%.
Yesterday’s inflation outturn, sticky core and a likelihood that Feb23 inflation (out in mid-Mar) might also stay above 6% raises the odds of a follow-up rate increase at the April rate review. Concurrently, markets are eyeing today’s US inflation in midst of the risk of a higher Fed’s terminal rate. Hence, a hawkish RBI MPC stance will also be supportive of the rupee, in the event of a bounce in US yields and unfavourable moves in the dollar index. Prospect of a further hike will mark a floor under the INR short-term yields, whilst upcoming auctions and heavy FY24 issuance pipeline are geared to lift 10Y yields over the next few quarters.
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