- Global oil benchmarks are down by more than a third.
- This would help mitigate terms-of-trade pressures and strengthen the current account position.
- Host of BOP-accretive measures will help with the capital account math.
- Monsoon watch. July-August rainfall will be important for crop output.
- Rate hike expectations are set to fade.
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OIL PRICES OFF THE BOIL
Financial markets have been driven by the recent developments on the US-Iran developments, while global oil prices have beat a sharp retreat, pricing in the likelihood that peak of the geopolitical risk has passed. That said, it is too soon to conclude that conflict-related risks have been fully addressed.
REVISITING MACRO ASSUMPTIONS, CURRENT ACCOUNT RISKS EBB
Average monthly trade deficit between Mar-May26 stood at $25.7bn vs $30.9bn in Jan-Feb26. Service exports have been firm, maintaining the Jan-Feb-26 run-rate, defying early concerns over AI-related slowdown in demand for software and capability centre services. Limited deterioration in the trade account also reflected in the current account balance in April which generated a modest surplus.
INFLATION RISKS – FUEL TO FOOD
Wholesale price index rose sharply to 9.7% yoy in May26, widening the wedge with the retail CPI inflation measure, which was at 3.9% yoy. The run-up in the WPI measure was driven by higher fuel, industrial raw materials, and manufacturing inflation, magnified by sharp depreciation in the currency, which further pushed up imported costs. While the sequential momentum will moderate, base effects and remnant cost push pressures will keep WPI inflation elevated in 2HFY27.
CAPITAL ACCOUNT GETS A HAND FROM RBI/GOI
Weakening capital flows have been an enduring problem for the external balances for well over a year, dominated by a slowdown in foreign portfolio inflows, and narrower net FDI position. Cumulatively these had pushed the balance of payments position to a deficit in FY26, alongside a moderation in offshore borrowings. First quarter of FY27 proved to be a challenge as geopolitical risks and strong interest in AI-related (and value chain) stocks drew interests away from the Indian equity markets. Foreign outflows added up to -$13bn as of 24 June, while FPI debt inflows turned a corner in May-June. Net FDI stood at $6.5bn in Apr26, after totalling $6.9bn in FY26. To support the capital account, the RBI and government undertook a host of measures in June 2026 to shore up inflows, which included (see table).
FISCAL AND MARKET IMPLICATIONS
The need to accommodate higher subsidies and lower revenue growth is likely to result in a modestly wider fiscal deficit in FY27. For inflation, geopolitics were a bigger worry rather monsoon for the central bank, in our view. We remove our rate hike forecast for FY27 and see downside to our end-year forecast for 10Y yield forecast of 6.9%.
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