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Commerzbank’s FX team notes India’s July CPI rose slightly to 4.5% year-on-year but stayed within the Reserve Bank of India’s target band, with core inflation steady at 3.9%. The bank expects RBI to keep the repo rate at 5.25% as food and energy pressures remain contained, while FX reserves near USD693bn give ample scope to smooth USD/INR volatility.
Stable rupee with strong reserve buffer
“July inflation rose slightly more than expected by 4.5% yoy (Bloomberg consensus: 4.4%) vs 4.4% in June. It marked the highest reading since December 2024, although it remained within the Reserve Bank of India’s (RBI) 2-6% target range. Year-to-date, inflation averaged 3.6%, remaining below RBI’s 4.0% mid-point target and its FY2026-2027 forecast of 5.0%.”
“On monetary policy, the contained inflation reading supports the view that RBI is likely to leave the policy repo rate unchanged at 5.25% for the foreseeable future. Governor Sanjay Malhotra said earlier this week that “inflation is more or less under check”, consistent with RBI’s relatively sanguine assessment of underlying price pressures.”
“While RBI expects inflation to rise in the coming months and peak in Q3, the improved monsoon backdrop and partial retreat in crude oil prices have reduced near-term inflation risks. This supports RBI’s neutral policy stance and a continued wait-and-see approach. A renewed tightening bias would likely require clearer evidence of second-order pass-through from higher food and energy prices into broader inflation.”
“RBI has ample firepower to smooth short-term volatility, with FX reserves rising USD10.5bn to USD693bn in the week ending 31 July, equivalent to 10.4 months of import cover. This was the largest weekly increase in six months and lifted reserves to a near three-month high. The increase was supported by inflows under RBI’s FCNR(B) deposit scheme, which had attracted USD36.7bn by end-July.”
“In FX, USD/INR fell 0.1% to 95.33 yesterday. USD/INR has remained within the 94.00-96.80 range for the past two months. There were reports that RBI sold USD in the onshore market to support INR amid elevated crude oil prices”
