Uptick in domestic inflation prints and an impending US rate lift-off later this week are likely to keep the Reserve Bank of India (RBI) cautious on the policy front. Markets see an over 70% probability of a US rate lift-off this week. Nov CPI and WPI inflation ticked up yesterday, lifted by rising food costs and fading base effects. Nov CPI inflation rose to a five month high of 5.4% (YoY) from Oct's 5%. Separately, WPI disinflation eased to -2% YoY up from -3.8% the month before. 

Food CPI inflation ticked up to 6.1% from Oct's 5.3% propped by a broad-based rise in pulses & products (46% YoY), protein costs, edible oils etc. The food subcomponent is likely to extend its climb into the Mar16 quarter as base effects fade and intermittent supply shortages emerge. At the same time, despite further pullback in global crude prices, renewed weakness in the currency is likely to limit the pass-through benefits. Service sector price pressures remain sticky and inched up to 3.8% YoY from 3.5% in Oct. Core CPI (ex food and fuel) rose 4.6%, off the Sep quarter lows. 

The other aspect of concern has been varying pace of rural and urban CPI inflation. Nov rural inflation quickened to 5.95% (vs Oct's 5.5%), outpacing urban at 4.7% (vs Oct's 4.3%). The sub-components also revealed a stronger run-rate in the former, apart from food. This divide will add to the central bank's calls for the government to ease structural bottlenecks to ensure a pass-through of the benefits from low commodity prices/ food costs and improve rural infrastructure to calm rural price pressures. 

WPI disinflation also eased to -2% YoY up from -3.8% the month before. With tradables accounting for a significant chunk of the wholesale price basket, the disinflationary trend here signals the absence of manufacturing/ global price pressures. It also implies that the sharp collapse in commodity prices has to some extent exaggerated the disinflationary process in the economy. Fading base effects are likely to lift WPI inflation back in black in the Mar16 quarter. 

Against this backdrop, the Reserve Bank of India (RBI) is likely to remain concerned over the sticky core CPI and service costs. Households' inflation expectations rebounded in the Sep15 survey. With expectations at still relatively elevated levels, the authorities stay concerned over generalised price pressures. Additionally, rising rising fiscal commitments, a go-slow on the reform agenda and an impending rise in US rates will see the central bank keep rates at hold in the Feb16 rate review.