April inflation undershot expectations, rising modestly to 3.5% yoy from 3.4% month before, below consensus at 3.8-3.9%. Food inflation continued to normalise, reversing from last year’s weak momentum, though at a more modest pace than expected. Price pressures were evident in perishables, pulses, protein-based items, and edible oils. Ongoing heatwave conditions are likely to lift the food component further this quarter, while markets also closely monitor El Niño developments and their implications for monsoon strength (India: El Niño’s rain check). Core inflation was benign, helped by a pullback in precious metal prices. Higher commercial LPG prices partially filtered through to services inflation via restaurant and accommodation costs. However, the broader impact of elevated global oil prices has yet to feed through to retail inflation, as pump fuel prices and subsidised products remain unchanged. Imported cost pressures, driven by elevated commodity prices and a weaker rupee, are expected to become more visible in wholesale inflation, which had already outpaced retail inflation in March and is likely to extend its uptrend into 2QCY. Average inflation in Jun26 quarter is tracking ~3.8% yoy vs 3.1% in Mar26 quarter.
Absence of fresh optimism on the US-Iran front, saw oil-sensitive USDINR reverse sharply higher past 95.60 intraday (fresh rupee low), fuelled by tepid foreign portfolio flows (equity -$22bn in CY26, debt +$1bn). A collapse in oil prices or a resumption in portfolio flows are pre-requisites for a durable turnaround in the rupee’s bearish run (-6.1% CYTD, worst performer vs regionals). Markets are pricing in rate hikes to defend the rupee and address potential inflationary pressures, although we do not expect policy tightening to be the immediate response. Inflation risks remain muted for now, although rising pump fuel prices and poor weather could exert both first- and second-round inflationary pressures. Secondly, policy actions outside conventional rate hikes will be tapped to anchor the currency, including a) removal of withholding tax for foreign investors in sovereign bonds; b) foreign currency bond issuances by state banks on hedged basis; c) deposit scheme to draw in non-resident deposits, backed by concessional swap rates to banks (which will necessitate a higher subsidy by the RBI in the context of higher US rates currently vs 2013). These tools will help buffer the financing mix under the BOP, though do little to revive risk-sensitive portfolio or reverse net FDI. Beyond this, the RBI policy committee still retains scope for calibrated rate hikes if inflationary pressures intensify. In the near-term, currency movements will be subject to headlines and prone to weakness till outflows reverse.
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