Crude above $100 may push India inflation to 6%, RBI could hike rates 50 bps: Kotak

Crude oil staying above $100 a barrel could push India's retail inflation towards 6% by the next quarter and put the Reserve Bank of India under pressure to raise interest rates by as much as 50 basis points this financial year, according to Anindya Banerjee, Head - Commodity and Currency at Kotak Securities.

Banerjee said sustained high oil prices could ripple through the Indian economy, affecting households, companies, oil marketing companies and government finances. India's current account deficit could widen to 1.8-2% of GDP in FY26 from around 0.5-0.6% in the previous financial year, he said.

"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."

If crude prices remain elevated, Banerjee expects retail inflation to move towards 5.8-6% by the next quarter, potentially forcing the RBI to respond with tighter monetary policy.

"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."

Despite the pressure on India's external balance, Banerjee said strong capital inflows through external commercial borrowings (ECBs) and foreign currency non-resident, or FCNR(B), deposits could help finance the current account deficit even as physical crude grades trade at significant premiums.

Rupee seen between 95.70 and 96.50

On the currency front, Banerjee expects the rupee to remain in a relatively narrow range against the dollar, with the RBI likely to intervene if depreciation pressures intensify. He sees USD/INR moving between 95.70 and 96.50.

"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.

Domestic money markets are also reflecting the changing interest-rate environment. Ample short-term liquidity is keeping shorter-tenure yields anchored, while the RBI's open market operation sales are steepening the yield curve. Banerjee expects the 10-year government bond yield to move towards 7-7.10%.

Yen carry trade risks contained for now

Banerjee also played down concerns about an immediate large-scale unwinding of the yen carry trade despite recent moves by major central banks.

"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.

Even as central banks raise interest rates, global risk assets continue to receive support from ample dollar liquidity, aided by US short-term Treasury operations and elevated fiscal deficits, according to Banerjee.

Gold, silver rally may have to wait

High US real yields are meanwhile keeping a lid on precious metals. With the US 10-year real yield at around 2.64%, Banerjee said gold and silver may struggle to stage a significant breakout until the interest-rate hiking cycle is over.

"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."

He expects gold to trade between $4,200 and $4,500 an ounce, while silver could remain in the $63-$68 range.

Oil rally may not last

Despite the immediate risks posed by expensive crude, Banerjee does not see the current surge in energy prices as a durable structural rally. He characterised the move as being driven largely by supply choke points and expects those pressures to ease 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.