Crude above USD 100 could push inflation towards 6%; RBI may raise rates by 50 bps this fiscal: Kotak Securities

The elevated crude oil prices pose a direct threat to India’s macroeconomic stability, with retail inflation projected to inch toward the 5.8 to 6.0 per cent mark by next quarter if prices stay elevated, according to Anindya Banerjee, Head – Commodity and Currency, Kotak Securities.

The elevated crude oil prices pose a direct threat to India’s macroeconomic stability, with retail inflation projected to inch toward the 5.8 to 6.0 per cent mark by next quarter if prices stay elevated, according to Anindya Banerjee, Head – Commodity and Currency, Kotak Securities. Speaking exclusively to ANI on Monday, Banerjee highlighted that Brent crude remaining above USD 100 per barrel will exert multiple rounds of pressure on the domestic economy.

He noted that India’s Current Account Deficit (CAD) could widen to 1.8 to 2.0 per cent of GDP in FY26, up from 0.5 to 0.6 per cent last fiscal. "The longer the oil prices stay above USD 100--why even USD 100, above USD 90--it will start to have multiple rounds of impact on the economy," Banerjee said.

He added, "It kind of acts as a tax on households. How much is the tax depends on who takes how much hit because there are three balance sheets on which this impact goes through: OMCs, government, corporates, and retail households." He noted that while physical spot grades are commanding massive premiums, large capital inflows via ECBs and FCNR(B) windows keep the deficit manageable to finance.

With persistent inflationary pressure, the Reserve Bank of India (RBI) is expected to resume monetary tightening, potentially delivering up to 50 basis points of rate hikes this financial year. "That's why RBI is going to be under pressure to hike rates," Banerjee emphasised.  "The market is already pencilling in 50 basis points this financial year--one in October, and one could be if they want to follow up immediately in December or in February."

On the global front, Banerjee played down immediate fears of a disruptive unwinding in the Yen carry trade following recent central bank moves. "Yen carry trade unwind, as of now, it's not happening in a big way... the Yen is kind of in a sweet spot," he explained.

He observed that despite synchronised rate hikes by major central banks, robust global dollar liquidity driven by US short-term Treasury operations and high fiscal deficits continues to cushion global risk assets. Addressing foreign exchange volatility, Banerjee projected the USD/INR pair to trade within a tight range of 95.70 to 96.50, expecting active intervention by the central bank.

"95.70, 95.60 is the best case for the rupee and 96 half to be protected from RBI... I think the RBI will push back against any attempt to break past 96 half because then it can try to make a new all-time low on the rupee," Banerjee stated. In local money markets, abundant short-term liquidity is anchoring short-end yields, whereas open market operation (OMO) sales by the central bank are steepening the curve, pushing 10-year bond yields toward 7.00 to 7.10 per cent.

Turning to precious metals, high US 10-year real yields around 2.64 per cent are currently capping runaway rallies in gold and silver. "That is not allowing the precious metals, gold and silver, to really take off," Banerjee noted. "The big rally is going to happen when we can see the interest rate hikes are behind us." Gold is anticipated to trade within a range of USD 4,200 to USD 4,500 per ounce, while silver oscillates between USD 63 and USD 68.

Differentiating between energy and industrial commodities, Banerjee described the current oil rally as a temporary, supply-choke-point-driven phenomenon expected to cool over the next 12 months. "Energy is in a thematic kind of a bull run... because it is one of the most artificial bull runs I've seen since I started tracking the markets," he remarked. (ANI)