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Early data highlights the immediate post-conflict impact on India. WPI inflation for March rose to a three-year high of 3.9% yoy, as the impact of higher commodity prices (crude oil, natural gas, manufactured items etc.) percolated through the fuel and power sub-segments, Add to this, the heavy weight manufactured products segment rose 3.4% yoy from 2.9% in Feb. Compared to retail inflation, the wholesale index is more sensitive to commodity and imported price pressures and is expected to rise further due to base effects and external factors. March CPI inflation, rose to 3.4% yoy, compared to our estimate at 3.45% and Feb’s 3.2%, but stayed below the mid-point of the target range. War related impact was visible in LPG price, and selective pass through of higher business costs to consumers (e.g. restaurants & accommodation at 2.9% in Mar vs 2.7% in Feb), while transport was broadly stable as retail fuel prices have been held unchanged. Utilities rose to 2% from 1.5% month before. Core inflation remained at benign levels, reducing the need for the central bank to assume a hawkish stance in the near-term (RBI: Neutral pause). The impact of El Nino and forecasts by local weather agencies pointing to below-normal southwest monsoon during the upcoming summer crop period also warrants attention.
Earlier this month, March’s manufacturing PMI eased to its lowest level in more than three years, though it remained in expansionary territory at 53.8, on softer new order growth, while input prices rose. Goods trade deficit in Mar26 narrowed to $21bn on a sharp fall in precious metal imports (gold & silver on price effects) as well as 36% drop in crude and products’ import volumes as prices rose. Exports declined by a less than expected -7.4% yoy on diversification benefits and petroleum exports (+6% yoy), even as exports to Saudi Arabia and UAE fell over 40-60% MoM basis. For FY26, a wider trade deficit was offset by resilience in service exports, which will help to keep the full year current account deficit close to a modest -0.6-0/7% of GDP. Overall, price impact is likely to be more pronounced than growth in the near-term, contingent on the longevity of the geopolitical tensions.
On the markets end, bond yields face two-way forces and are expected to hover within 6.8-7.0% in absence of fresh signs of an escalation in Middle east tensions. Banking system liquidity is, meanwhile, in significant surplus, with overnight rates little moved by the recent VRRR auction. Nonetheless, the announcement of the auction was taken as an indication of the authorities’ resolve to temper the cash surplus and align the overnight rate close to the repo, affirming their neutral stance on policy. On FX, the RBI had undertaken administrative action to put brakes on rupee’s one-way depreciation, with the USDINR holding up above 93.00 mid-week, off near record 95.0 in Mar. These FX curbs have raised hedging costs for foreign investors, which alongside disruption in onshore and NDF price discovery, as well as volatility in FX swap implied yields, have weighed on equity (-$3bn in Apr26) and debt (-$1.3bn) flows.
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