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

Crude oil prices above $100 per barrel could drive India's retail inflation close to 6% within the next quarter, according to Anindya Banerjee, Head of Commodity and Currency at Kotak Securities. Banerjee warns that sustained high oil prices could disrupt various sectors, including households, businesses, oil marketing companies, and government finances.

He anticipates India's current account deficit to widen to 1.8-2% of GDP in FY26, up from around 0.5-0.6% in the previous financial year. Banerjee believes that protracted oil prices above $100, or even $90, will have a cascading effect on the economy. He asserts that high oil prices act as a "tax" on households, with the impact distributed among OMCs, government, corporations, and retail consumers.

As a result, Banerjee predicts retail inflation could reach 5.8-6% in the next quarter, potentially prompting the RBI to raise interest rates. The market anticipates two rate hikes this financial year, one in October and another in December or February. Despite external pressures, Banerjee remains optimistic about India's external balance, citing robust capital inflows through ECBs and FCNR(B) deposits.

On the currency front, Banerjee expects the rupee to stay within a narrow band against the dollar, with the RBI likely to intervene if depreciation accelerates. He forecasts USD/INR to hover between 95.70 and 96.50. Regarding government bonds, Banerjee anticipates the 10-year yield to climb to 7-7.10%. He downplays concerns about a rapid unwinding of the yen carry trade, citing recent central bank actions.

He further notes that high US real yields are suppressing precious metals, and suggests gold may trade between $4,200 and $4,500, while silver could remain in the $63-$68 range. Banerjee believes the oil rally may not be sustained, attributing it to temporary supply constraints and expects the situation to improve within a year.