Risk sentiment towards asset markets of oil-dependent economies benefited significantly on the US-Iran peace deal announcement. India’s equity, bonds, and rupee (+0.5%) ended up higher on Monday, further fuelling a turnaround that was already underway since the RBI announced BOP-supportive measures on 5-June. Street estimates are that the policy measures could attract $50-$80bn by Dec26, providing the central bank the room to gradually unwind its wide offshore FX book and push up domestic liquidity. In the near-term, there is scope for further downside in the USDINR on expectations of these flows and lower commodity prices. On 10Y bonds, a return to pre-conflict yields will require rate hike expectations to be priced out fully and investors to see limited risk of a fiscal slippage, both of which have not been completed addressed at this juncture. The reduced need for open market operations relative to FY26, together with a shift in the domestic liquidity balance toward surplus (attract liquidity-draining operations) could also provide a floor.
Incoming data for April-June reflect the impact of higher energy prices. Rebased WPI inflation released yesterday jumped to 9.7% YoY from 8.3% month before, reflecting the pass through of higher commodity prices, increase in ex-factory costs and a weak rupee. The maiden PPI series is also being issued from April, paving the way for a gradual phasing out of the WPI series over the next five years. In lockstep with WPI, output PPI also jumped to 9.4% YoY from 8.1% month before. Base year has been updated to 2022-23, covering a wider basket of ~957 items. May trade deficit was largely steady at $28.2bn vs April's $28.4bn, as a wider net oil import bill was offset by slower demand for gold and silver purchases ($3.5bn vs 6% month before). Meanwhile, the RBI switched to releasing monthly current account numbers vs the previous practise of quarterly numbers with a lag. Apr26 current account registered a small surplus of $4.7bn vs a deficit same time last year. While the goods trade deficit widened in the month, resilience in service trade ($18.6bn vs 15.9bn in Apr25) and a sharp jump in remittances offset the gap. The shortfall in the capital account (-$11.3bn vs +$5.3bn in Apr25), nonetheless, widened on portfolio outflows, smaller rise in offshore borrowings and deficit in banking capital, but the extent of deficit was partly mitigated by a pick-up in net FDI flows. This math led the overall balance of payments in April to slip into deficit to the tune of -$6.6bn vs +$0.5bn same month last year. With a sharp correction in oil prices in recent weeks, the extent of deterioration expected in the annual trade as well as current account is likely to be less than previously projected. A narrower CAD and flow-supportive measures are expected to push the BOP back to surplus this year. We will release our updated macro projections in an upcoming note.
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