India’s retail inflation accelerated to a 17-month high of 6.95% YoY in Mar-22, breaching the upper end of RBI’s inflation targeting band for third month in a row. We expect CPI inflation to remain elevated, averaging at ~6.6% in H1 FY23 on account of residual pass-through of higher international fuel prices, spill overs from elevated global food inflation, esp. in case of edible oils and cereals, likelihood of higher upward adjustment in MSPs, and ongoing pass-through to core inflation amidst unlocking of the economy. Thereafter, CPI inflation is likely to moderate towards 5.4-5.9% in H2 FY23 on anticipation of a normal monsoon outturn, easing of domestic supply disruptions, and lower than trend growth in demand inhibiting complete pass-through of high input prices. We continue to expect RBI’s MPC to shift its policy stance to neutral in Jun-22 followed by a 25 bps hike in repo rate in Aug-22. However, any deterioration of inflation risks for FY23 could potentially accelerate the monetary policy normalization process with rate hike commencing earlier as well as lasting longer.
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