Onshore markets are monitoring global geopolitical developments closely as oil price benchmarks rebound. 10Y bond yield traded slightly higher at the start of this week but is still well below levels seen during the peak of the West Asia crisis, staying below 6.8%. Bonds reacted little to Apr-May fiscal data, which saw a 18% increase in expenditure, partly due to a 47% jump in major subsidy outlay and strong beat in capex. USDINR climbed further to high-95 handle on Monday but ran into stiff intervention. Despite an improved outlook for capital flows—supported by stronger inflows into non-resident deposits, a pickup in offshore borrowing, and foreign investors turning net buyers in domestic equities (July inflows of US$2.1bn into equities and US$700mn into debt)—the rebound in global oil prices has clouded the near-term prospects for rupee appreciation.
Impact of high oil prices from 2Q is still filtering through incoming high-frequency numbers. June inflation accelerated to 4.4% yoy, an 18-month high, from 3.9% in May, reflecting the continued normalisation of food prices and pass-through of pump price increases implemented in mid-May. Perishables, along with cereals, pulses and milk, rose on a sequential basis. Beyond food and fuel, upside risks to core inflation remained limited this quarter, amid softer gold prices, as well as limited scope for further retail fuel price adjustments, unless global prices rise sharply. Markets are also focused on the spatial and geographical distribution of the ongoing southwest monsoon. The nationwide rainfall deficit had narrowed considerably in July, from a shortfall of over 40% at the end of June, although the momentum has weakened in the past 2-3days. Total crop area sown is 16% below last year, reflecting an 8% and 23% decline in rice and pulses sowing respectively as of 10-July. While policymakers remain vigilant to weather and geopolitical risks, the lack of discernible spillovers to demand should limit any market tendency to frontload rate hike expectations. June goods trade deficit widened sharply to $30bn following a 31% increase in imports (40% jump in petroleum crude purchases) and second-largest electronics up 59% yoy. Trailing the strong performance of Asian peers, exports rose 15% yoy, receiving a hand from key categories including electronics. Exports to the US declined in June, but increased strongly to Singapore, China, Netherlands, UK, South Africa. Apr-Jun26 (1QFY27) goods trade deficit has effectively widened by a third compared to the same period last year. Correction in oil prices in July is likely to limit incremental deterioration in 3Q (2QFY27).
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