Hopes of a resolution to the West Asia tensions leading to lower oil prices, along with central bank intervention and expectations of a rate hike, have supported rupee’s appreciation over the past few sessions, from near 97.00 low to mid-95.00 on Monday, up a cumulative ~1.5%. RBI Governor Malhotra’s observation that the rupee appeared undervalued signalled a notable shift from the traditionally restrained approach toward commenting on currency valuation. INR REER stood at 91.00 in Apr26, near a twelve-year low. He also added that the central bank will “do whatever it takes to ensure orderly price discovery in the forex market”, amidst market chatter last week that potential rate hikes were discussed (subsequently downplayed) besides several other likely steps to backstop the currency. In the absence of a clear risk of headline inflation spilling over into the core and signs of unanchored inflationary expectations, the central bank is likely to view the energy shock as a supply-side price catalyst and defer tightening policy at the upcoming meeting. An argument can, nonetheless, be made on the need to tighten policy in 2HCY26 if the conflict continues, to attract rate sensitive flows. Add to this, the inflation rationale has also gained credibility amid successive pump price increases (~7% over the past two weeks), a pickup in food, impact of prevailing heatwave conditions and rising business inflation expectations, all of which point to mounting underlying price pressures.
The RBI announced a record INR 2.87trn (0.7% of GDP) dividend contribution towards the FY27 Budget, up 7% on the year. The RBI maintained its contingent risk buffer (CRB) at 6.5% of the 4.5-7.5% range. Had the CRB being maintained at 7.5%, the dividend payout would have been ~INR920bn lower than the announced levels. While details are awaited, higher income likely stemmed from higher interest receipts from G-secs, and foreign exchange trade income (even as gross FX sales in FY26 were lower than FY25), which helped to offset provisioning needs and potential MTM miss. With the scale of the dividend being along budgeted lines, there will be limited additional boost to revenues. Allocations towards subsidies (energy and fertiliser +0.2% of GDP) is likely to increase this year, alongside a potential divestment shortfall, lifting spending needs. These can be partly mitigated by a higher nominal GDP (providing cushion to ratios), besides the backstop of the economic stabilisation fund (size is 0.25% of GDP), and a reduction in capex/non-sticky spending items. Setting off both sides, cumulative slippage risk stands at ~0.2-0.3% of GDP vs -4.3% budgeted deficit. 10Y bond yields are off highs, but room for further correction will require a sharper fall in oil prices (and easing fiscal pressures by extension), and stabilisation in global yields. 
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