INR: A further uptick in inflation - Commerzbank

Headline inflation in October climbed to 6.2% yoy vs 5.5% in September. This was the first time inflation rose above the upper end of RBI's 2-6% target range since August 2023. Food and beverage prices, 46% of the weight in the CPI index, were once again the main driver, mainly due to higher vegetable prices, Commerzbank's FX analyst Charlie Lay notes.

Few signs of a mark growth slowdown

"Core inflation, which strips out food and energy, was just slightly higher at 3.7% yoy vs 3.5% previously. In the first 10 months of the year, headline inflation averaged 4.9% and core inflation was at 3.4%. The uptick in headline inflation is expected to be transitory as the good monsoon this year should lead to lower vegetable and other food prices into year-end."

"On the growth front, industrial production in September picked up 3.1% yoy vs -0.1% in August. Encouragingly, capital goods production was firmer at 2.8%, suggesting a supportive investment environment. There were no signs of a slowdown in domestic demand as consumer durable production were firmer at 6.5% yoy."

"RBI will look beyond the uptick in inflation. Nevertheless, it will cause them to take note push out expectations of a rate cut into H1 2025. This should also provide some support for INR. INR has weakened against the USD since the end of September. This is due to the stronger USD as seen by the weakness in other Asian currencies against the USD. RBI will remain focused on a stable INR, in order not to exacerbate the inflation picture."