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The Oct'22 retail inflation at 6.8% reversed the spike of the previous month. Despite several upside risks and the unfavourable base for food and fuel, retail inflation seems to have passed the peak. A rapid cooling off is unlikely given the base and current momentum. With duty and tax cuts on petroleum products and the ban on some food exports, drivers of inflation seem to have shifted from global to domestic factors. With retail inflation above the RBI’s comfort zone, rate hikes would continue. Another 50-60bp rate hike is still on the cards although a pause orasmallhike is likely in the next policy.

Inflation softened again. In Oct'22, India’s retail inflation at 6.8% declined again after thespikeinthe previous month. The reading wasbroadly in line with expectations.

Softening led by food and fuel. While compared to the previous month, all broad categories registered softer inflation in Oct’22, the fall was mainly on account of food. After a spike in Sep’22, food inflation cooled off in Oct’22. Both of these – the rise in food inflation in Sep’22 and fall in Oct’22 – were driven to a large extent by vegetables. Despite a modest fall, core inflation at 6% has been nearly unchanged for the last 12 months.

India’s inflation turning more domestic driven. While high crude oil prices and a softer rupee keep fuel (including transport) inflation elevated, duty and tax cuts and the staggered pass-through of international oil prices have reduced the impact. While inflation is a concern for India like most other countries, the driversof inflation inIndia are different from peers.

Inflation risks persist but the peak seems to be behind. Geo-political and weather-related upside risks to near-term inflation continue as also the unfavourable base effect for food and fuel. Yet, the recent softening of global commodity prices, easing of some global supply-chain problems and the absence of demand pressures seem to indicate retail inflation is past the peak. With an unfavourable base for food products,especially vegetables and cereals, wedo notexpect asharpsoftening until Mar’23.

Rate hike to continue. Inflation in India remains well outside the RBI’s comfort zone and core inflation remains sticky near 6%. With repo rate at 5.9% and SDF at 5.65%, we expect the RBI to be highly data driven in future rate decisions. A pause or a small hike looks likely in the next policy. Yet, another 50-60 bps rate hike in this cycle remainsoncards with the terminal repo rate closeto6.5%.

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