Update to India Inflation and Massive Repricing of USD Rates

India CPI inflation for the month of February came in at 6.44% , marginally lower than 6.52% recorded in the month of January and above my estimates of 6.00% - 6.20%.

Let's quickly crunch the data:

Mom headline CPI rose 0.21%. Only F&B (w. 45.86%) recorded negative momentum in prices but the rest of the basket saw mom rises. Housing (w. 10%) was up 0.80% mom; pan, tobacco and intoxicants plus clothing and footwear plus miscellaneous (w. 37% ) was up 0.40%, while food and beverages was down a marginal 0.06% (w. 46%). While declines were recorded in most of the F&B sub components, cereals, milk, spices, prepared mails recorded a rise.

Core CPI continues to be elevated at 6.10%.

RBI projects Q4 FY 23 inflation at 5.70%. The Jan and Feb outturn at 6.52% and 6.44% was higher. My own estimates for March 23 inflation are at 5.62% which if the data comes in line will take the quarterly average at 6.16% above RBI's Estimates. Market is pricing in another 25 bps of rate hikes in the April policy.

March onwards, base effects start kicking in and my estimates for the Apr - Jun period are at average CPI reading b/w 4.75% - 4.80%.

Between 08th March 23 and afternoon 14th March 23 the repricing in USD rates is phenomenal. Look at the table below to see how the Rates have pivoted from the highs post hawkish testimony by Chairman Jerome Powell and following the SVB Bank shutdown.

Likewise, the OIS rates were received in initial part of the session with 1Y OIS recording a low of 6.68% (prior day close 6.83%) and 5Y OIS recording a low of 6.25% (prior day close 6.37%) before retracing on profit booking and ahead of the US CPI data.

Post the mini banking crisis, a lot is contingent on the direction of US monetary policy and the steps the Fed takes to contain the risk of contagion and calm market nerves. US CPI inflation data will be released today with consensus expectations of a reading of 6% yoy and 0.40% mom. The Fed's job is only too complicated if the print surprises on the upside. We are in for some really interesting times in the market and a roller-coaster ride.

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