The State Bank of India's research department has revised its December monetary policy call to a 25-basis-point repo rate hike from its earlier expectation of a 50-bps increase, citing improved currency stability, renewed foreign portfolio inflows, softer crude oil prices and easing global financial conditions. SBI Research also sees a 50% probability of the terminal repo rate being lowered to 5.75% from its current projection of 6.0%.

India's retail inflation rose to 6.09% in October, crossing the RBI's upper tolerance limit of 6% for the first time in the new CPI series. SBI Research expects inflation to remain above 6% in November before moderating thereafter, according to its latest Ecowrap report.

The report said four developments have shifted the balance of probabilities towards a smaller rate increase. First, the rupee has shown signs of stability, moving below 94 per dollar before weakening again. Banking system liquidity conditions have also improved, with the call rate declining below the marginal standing facility rate of 5.44% after touching 5.8% in late October.

Second, foreign portfolio inflows have revived, reaching around $7.68 billion since November 4, while the rupee appreciated 0.7% against the dollar. SBI Research said improving global sentiment and a correction in artificial intelligence-related valuations could support further foreign inflows.

Third, Brent crude prices have declined 11.1% since the US elections, easing concerns over imported inflation. The report expects crude prices to average around $87 per barrel in the near term, with a possibility of falling towards $70 in 2027 if geopolitical tensions ease.

Fourth, US Treasury yields are expected to soften, with the 10-year yield potentially moving towards 4.75%. SBI Research expects India's 10-year government bond yield to settle between 6.75% and 7%, with a downward bias.

The research department expects the terminal repo rate to settle at 6.0%, while assigning a 50% probability to a lower terminal rate of 5.75%. It does not consider another rate hike in February advisable, given the proximity to the Union Budget, and expects the RBI to adopt a more data-dependent approach after December.

On inflation, SBI Research said food and beverages inflation accelerated to 8.51% in October, while core inflation rose to 4.75% from 4.60% in September. Restaurant and accommodation services inflation crossed 10%, reaching 10.06%.

The report's weekly price analysis suggests November inflation could peak at around 6.3%. It also argued that El Nino-related food inflation risks may be limited to certain regions and crops, including oilseeds, sugarcane and pulses.