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Today’s RBI’s MPC meeting outcome will underscore if it the prioritizes currency stability through tighter policy rates or remains guided by the currently benign inflation. Since the April review, elevated oil prices have triggered a correction in local assets, with the INR depreciating by ~3% since April, and down a cumulative 6% in CY26. We expect the RBI MPC to hold the benchmark rate unchanged at 5.25%. Headline CPI inflation is tracking the midpoint of the 2-6% target range in May. In the absence of significant spillovers into core inflation as yet and with inflation expectations still anchored, the central bank might reason that the second-round effects are not evident at this juncture, backing a wait-and-watch approach. A hawkish pause would, nonetheless, underscore the central bank’s resolve to defend the currency, while recognizing that tighter policy rates have historically only had a limited impact on exchange-rate dynamics. Specific measures could be announced to boost inflows, especially into debt. This includes potential tax breaks in withholding (currently 20%) and capital gains, as well as increasing the number of securities allowed under the Fully Accessible Route category. Foreign investors have been net buyers of debt to the tune of $1.1bn so far in CY26, but have cut exposure to equities (-$27bn outflows).
Out later in the day, real GDP growth likely rose 7.3%yoy in 1Q26 (4QFY26), moderating from 7.8% quarter before. Demand-side indicators largely held up in the Mar26 quarter, providing resilience to the growth number. A build-up in cost pressures late in the quarter was likely evident in the supply segments, though corporates likely absorbed these by tapping into inventories and not meaningfully scaling back production. There were few pockets of softness in investment components, like new project announcements, infra industries and PMI readings that are still in expansionary territory but off early-2026 levels. Services are expected to stay firm, lifted by credit growth and strength in GST receipts last quarter. Markets will likely focus on potential spillover risks into FY27, particularly given the prospect of a prolonged disruption in the supply of critical inputs to downstream industries, impacting plastics, food, pharma, paints, and packaging materials. 
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