Concerns over a revival in the West Asia tensions have resurfaced after the US raised doubts over the longevity of the ceasefire with Iran. This posturing might be viewed as a negotiating tactic to put pressure on other actors to secure more favourable terms, but in the interim oil-sensitive currencies, especially the rupee, face renewed volatility as Brent prices extend gains. USDINR had already broken back above 95.00 in the past week in a sharp stop-loss driven move, emboldened by minimal smoothening activity, and defying expectations of a near-term appreciation bias on inflows. In the past fortnight, short-term FX maturities worth ~USD20bn are expected to have rolled off the central bank’s forward book. A larger proportion of the >1Y bucket remains and is expected to constrain the room to intervene in the forwards market in the coming quarters to avoid adding to the book. The 10Y G-Sec yield extended its decline below 6.7% last week, but further downside is likely to be limited by higher oil prices and firmer global bond yields.
The nationwide monsoon shortfall has narrowed considerably into July to -17% (as of 7 July), from over 40% gap in end-June, with key crop-producing belts of central and northwest India witnessing improvements. June CPI inflation out next week is expected to rise marginally to 4.1% yoy from 3.9% the month before, on continued normalisation in food segments and passthrough of fuel costs through the related segments. Beyond food and fuel, upside risks to core inflation appear limited, amid softer gold and precious metal prices and little scope for further pump price adjustments. Separately, India has been focused on strengthening bilateral ties with key partners beyond the US, marked by Japanese PM Takaichi’s visit last week and PM Modi’s ongoing tour to Indonesia, Australia, and New Zealand. Collaboration with Japan included discussions on projects in green fuels/ mobility vehicles (EVs, ethanol), oil reserves infra, semiconductors, etc. Focus of the ongoing tour is likely to be dominated by defence agreements (cruise missile sales by India), critical mineral supplies, industrial commodities, energy security, and to deepen diplomatic relationships. India has pursued a steady flow of bilateral free trade agreements since mid-2025, finalising deals with the EU, UK, Oman, New Zealand, and EFTA, and are in discussions with few others.
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