India’s retail inflation fell below the Reserve Bank’s upper tolerance level of 6% for the first time in 11 months in November due to softening of food prices, but a pause in interest rate hikes may still not be on the cards. The central bank is still concerned about high core inflation, which continues to be sticky.

The consumer price index (CPI) based inflation declined for the second consecutive month to 5.88% in November, from 6.77% in October 2022. It was 4.91% in November last year.

In a bid to tame inflation, the RBI has raised benchmark interest rates by 2.25% in five tranches since May, including a 35 basis points hike last week. Banks as a result have also raised rates, leading to costlier loans for borrowers.

Aditi Nayar, chief economist at ICRA, said the CPI inflation unexpectedly slipped below 6% in November, reflecting a base-effect led cooling in food inflation and a correction in vegetable prices.

Inflation in the food basket, which account for nearly 40% of the CPI basket, was 4.67% in November versus 7.01% a month ago.

However, there was a sequential uptick in the year-on-year inflation for miscellaneous items, fuel and light, and pan, tobacco and intoxicants segments.

"How much the CPI inflation eases further in December 2022 will hold the key to the MPC's February policy decision on rates, as the contraction in the IIP is expected to be transitory, reversing after the festive holiday period," Nayar added.

Meanwhile, the index of industrial production (IIP) contracted 4% in October, mainly due to a decline in the manufacturing sector output and subdued growth in mining and power generation.

Madan Sabnavis, chief economist at Bank of Baroda, said although there is easing in food prices, the core component continues to be irksome, with clothing and footwear, fuel and light and the miscellaneous categories witnessing high inflation of above 6% each.

Within the miscellaneous group, inflation has been high in household goods, health, recreation, education and personal care. "Companies have been passing on higher input costs to the customers which has resulted in this category being sticky," he noted.

Sabnavis said since the advantage of the base effect will not be available in December, inflation can be above 6.5%.

"We may expect RBI to continue to increase rates by another 25 bps in February as inflation will be above 6%," he said.

After remaining above the Reserve Bank's upper tolerance threshold of 6% since January, retail inflation has declined to its lowest level in 11 months in November 2022. In December 2021, the retail inflation stood at 5.66%.

The Reserve Bank had last week said the worst of inflation is behind us, but there is no room for complacency and hiked the benchmark policy rate by 35 basis points to 6.25%. The central bank also said it will keep 'Arjuna’s eye' (keen focus) on the evolving inflation dynamics and projected inflation to remain above 4% for the next 12 months.

Assuming an average crude oil price (Indian basket) of USD 100 per barrel, the RBI projected headline inflation to average 6.7% in 2022-23, with Q3 (October-December) at 6.6% and Q4 (January-March) at 5.9%.

Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said the downside in inflation was largely led by select food items while core inflation remains quite sticky.

"We continue to see scope for another 25 bps repo rate hike in the February policy but the recent softness in data, if continues, clearly points towards the repo rate nearing the peak at 6.5%," Bhardwaj said.