For the first time in new series, CPI inflation crossed the 6% mark and stood at 6.09% in October 2026. This is also the first time
that inflation has crossed the RBI’s upper tolerance level. Our projections indicate that inflation will remain above 6% mark for
the next month (two weeks price data trend for November from Department of Consumer Affairs also confirms the same) and
decelerate thereafter.
“When facts change, I change my mind. What do you do sir?”. We had earlier outlined two possible policy options for the RBI’s
December 2026 MPC meeting: aggressive 50 bps hike or a 25-bps rate hike with another 25-bps rate hike through corridor
widening. However, considering recent developments, we believe that the balance of probabilities has decisively shifted
towards a 25-bps rate hike in December, rather than a larger 50-bps adjustment.
Four key factors underpin our assessment. First, exchange-rate stability: The RBI's efforts to manage rupee volatility have
yielded results, with the currency moving back below Rs 94/USD before moving up. It has also successfully eased liquidity
pressures, with the call rate, which had risen to as high as 5.8% in last week of October, subsequently declining to below the
MSF rate (5.44% as of today).
Second, the improvement in the external environment, supported by the revival in capital flows, should help ease pressure on
the rupee. Furthermore, correction in AI story improves India’s relative valuation and this will support FII inflows. FII inflows
have already reached approximately US$7.65 billion since 6 November. Interestingly, Anthropic's entry into the public equity
market, likely on Nov 12th with an earlier target valuation between $1.5 trillion and $2 trillion now stands reduced significantly
to $1.4 trillion and it clearly serves as barometer for the sustenance of the artificial intelligence boom at current levels. This
makes us believe that India is likely to gain post November 3 elections.
Third, the prospect of de-escalation in the US–Iran conflict has improved the outlook for crude oil prices. Post US election
crude oil has fallen by 11%. Crude oil prices are expected to moderate from their historical high levels average around $87.
Fourth, US Treasury yields are likely to soften further following the Democrats victory in US mid-term elections. We expect
the US 10-year yield to move towards 4.75%. For India, we believe that the 10-year yields will likely settle in 6.75-7%, but now
with a clear downward bias. Importantly, expectations of three to four successive rate hikes, which had gained traction earlier,
now appear to be an outlier. We see the terminal repo rate settling at around 6.0%, with a downside possibility of 5.75%. We
assign a 50:50 probability to both these possibilities.
We do not consider a further rate hike in February advisable, particularly given the proximity to the Union Budget. Instead,
we expect the December 25 bps hike to be followed by a more data-dependent policy approach. This also leaves room for a
downward revision in terminal-rate expectations.
An important source of price data is the Department of Consumer Affairs (DoCA). The DoCA monitors daily retail and wholesale
prices of 41 essential food items based on the information received from 579 centers and tracks consumer price indices through
the Price Monitoring Division (PMD). However, the coverage of items is very limited. We strongly recommend that PMD
should increase the number of quantities so that a better prediction of inflation situation may be possible before the release
of CPI data.
Possibility of El Nino has caused unfounded fear. Our detailed assessment reveals that the impact of El Nino could be limited
and in certain pockets. Thus, the impact on food inflation could be contained. Some impact could be visible in oilseeds,
sugarcane and pulses; however, the overall impact will be limited.