Commerzbank economists note India’s August CPI rose to 4.8% year-on-year, above the RBI midpoint but still below the central bank’s full-year forecast. They see a more finely balanced policy outlook, with a likely hawkish hold at 5.25%. A narrower trade deficit and strong capital inflows should support INR, even as higher Oil prices pressure inflation and the currency.

Higher CPI but supportive external mix

“August CPI inflation rose to 4.8% yoy (Bloomberg consensus: 4.9%) vs 4.5% in July. This was the highest reading since December 2024 and the third consecutive month above the Reserve Bank of India’s (RBI) 4% midpoint target.”

“Inflation averaged around 3.8% year-to-date, remaining below the RBI’s FY2026-2027 forecast of 5.0% and in the lower half of its 2-6% target range. Nevertheless, if oil prices remain high for an extended period, the risk is to the upside.”

“Nevertheless, the policy outlook has consequently become more finely balanced. RBI is expected to leave the policy rate unchanged at 5.25% at its next meeting on 7 October, but it could be a hawkish hold. RBI Governor Sanjay Malhotra said last Friday that underlying price pressures remain low, suggesting limited urgency to tighten monetary policy for now.”

“On trade, the August trade deficit narrowed more than expected to USD26.9bn (Bloomberg consensus: USD32.2bn) vs USD32.0 in July.”

“The narrower trade deficit should support India’s external position after the current account swung to a USD4.2bn deficit in Q2 from a USD6.5bn surplus in Q1. At the same time, measures aimed at attracting foreign capital have strengthened the financial account.”

“In FX, USD/INR rose 0.4% to 95.96 yesterday, just below the psychologically important 96.00 level. INR had weakened due to higher crude oil prices and the firmer USD.”