India’s retail inflation accelerated to a 7-month high of 6.01% YoY in Jan-22, coming in at the upper end of RBI’s inflation targeting band, vis-à-vis 5.66% in Dec-21. In the near term, pressure could persist on the upside as pipeline inflation gets captured with a lag. Going into FY23, we see the possibility of (4.5-5.5-6.5%) on (food, core, fuel) inflation as proximate drivers of headline inflation. While easing of supply chain disruptions, favorable statistical base effect, capex-oriented government spending, and interest rate normalization would argue for a sizeable deceleration in CPI inflation, there could be upside form a catch up on pass-through of elevated input prices as organic economic recovery strengthens. Overall, we expect CPI inflation to carry a mild downside bias to 5.3% in FY23 vis-à-vis 5.4% in FY22.
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