Outlook for the Month of May’26

Economy Review

The key events in the month were –

Domestic Factors –

a) Trade Deficit – India’s trade deficit narrowed to $21bn in Mar’26 from $27bn in Feb’26, due to fall in gold and oil imports.

b) RBI Monetary Policy – RBI in its April’26 monetary policy unanimously decided to keep the repo rate unchanged at 5.25%. RBI estimates FY2027 inflation at 4.6% and real GDP growth at 6.9%.

c) IMD – IMD has projected a below-normal monsoon for India, with rainfall at 92% of the long period average.

d) Diesel, ATF & LPG Prices – Center has reduced the excise duty (Special Additional Excise duty) on exports of diesel and ATF to Rs 23/liter (from Rs55.5/liter) and Rs33/liter (from Rs42/liter) respectively with effect from 1st May’26. Commercial LPG cylinder prices have been increased by Rs 993 with immediate effect.

e) Currency – Indian rupee has again breached the 95-per-dollar mark on geopolitical tensions in West Asia weighing on oil and gas supply disruption.

Global Factors –

a) West Asia conflict – There has been a temporary cease fire in the West Asia War but no final resolution on ending the war has been reached. The movement of ships along the Strait of Hormuz remains constrained as US has blocked it.

b) Crude Oil – Brent crude oil prices remain elevated in the range of $100-$120/bbl as the Strait of Hormuz blockage continues, which impact global oil supplies.

c) FED – The FOMC kept the Federal Funds rate unchanged within the 3.5-3.75% range for the third consecutive time.

Domestic Macro Economic Data

Inflation – India’s CPI inflation inched up to 3.4% yoy in March’26 led by an uptrend in inflation across the food basket. Core inflation was at 3.7% yoy. WPI inflation for the month of March’26 rose to 3.9% due to sharp rise in prices of fuel, power and manufactured goods amid the West Asia crisis.

Outlook for Equities
The Indian equity markets surged 7.5% in April’26 despite the ongoing West Asia conflict, rising crude oil prices and FII outflow. The Indian rupee had breached the 95-per-dollar mark and Brent crude oil remains in the range of $100-$120/bbl. Mid-cap and small-cap indices outperformed the large cap index and gained 14% and 18% respectively.

West Asia conflict has continued for over 2 months with talks going on for a final resolution. Blockade of Strait of Hormuz by US has further disrupted oil and gas supplies globally. On the domestic side, RBI has kept key policy rates unchanged in the April’26 meet. IMD has projected a below-normal monsoon for India. Anti-incumbency sets in with BJP winning in West Bengal and TVK leading in Tamil Nadu. FIIs sold $5.1bn worth of Indian equities whereas DIIs bought $5.4bn of equities during the month of April’26.

Nifty is currently trading at ~17x FY28e P/E. We expect Nifty earnings to grow at 13-15% CAGR over FY26-28. Investors can continue to invest in equities from a medium to long-term perspective. The key monitorable is the ongoing Middle East crisis and its impact on India’s macros and currency.

Outlook for Debt
RBI MPC in April’26 unanimously decided to keep the policy repo rate unchanged at 5.25%. The policy stance was maintained at “neutral”. Governor highlighted that RBI would remain proactive and preemptive in liquidity management while ensuring sufficient liquidity in the banking system. RBI estimated FY2027 inflation at 4.6% with core inflation at 4.4% assuming an average crude price of $85/bbl and an average USD-INR of 94. RBI also estimated real GDP growth at 6.9% in FY2027 considering the risks to domestic production due to the West Asia crisis would be offset by government’s proactive measures (GST, excise cuts), rising capacity utilization and healthy balance sheets. The minutes of RBI’s April MPC meeting reiterated that while growth-inflation dynamics have deteriorated, RBI found it prudent to wait and watch for the impact of the conflict, as inflation outlook remains within the tolerance band. They also highlighted that monetary policy has limited ability to quell direct effects of a supply-induced inflation shock.

INR again surpassed the 95 level in April’26 making a new all time low of 95.33 against the dollar on 30th April’26. Banking system liquidity remained in comfortable surplus with healthy Government cash balances. India’s goods trade deficit narrowed to $20.7 bn in March’26 due to oil imports shrinking due to supply shocks, gold imports also declined significantly. Services trade surplus in March’26 was at $18.2 bn improved marginally from the significantly downward revised print of $17.8 bn in February’26. CPI inflation inched up to 3.4% YoY in March’26 and averaged 2.5% in FY2026 based on the new CPI series, led by an uptrend in inflation across the food basket. Core inflation was at 3.7% YoY. WPI inflation for March’26 was at 3.9% YoY. Fuel and power inflation was at 1.1% YoY climbing out of deflationary zone.

In the global markets FOMC kept key policy rates unchanged as Powell announced his last FOMC as Governor. This was a hawkish hold as 3 members dissented against language suggesting door for future rate cuts remains open. FOMC guided towards higher inflationary pressures. Market has currently priced out probability of rate cuts in 2026. Bank of Japan in its policy meeting delivered a hawkish hold paving the way for rate hike in June. BoJ revised their inflation forecasts higher for 2026 and 2027 while mentioning in policy report that inflationary concerns are more prominent than growth concerns. ECB and BoE also kept key rates on hold guiding towards potential higher inflationary concerns. Brent crude prices have skyrocketed since the war and recently scaled above $120/bbl rising around 56% in two months. Precious metals have also come under pressure as bets of rate cuts from major central banks have faded.

In the near term, markets await resolution of West Asia crisis, reaction to Gsec supply in H1FY27, path of CPI data and government actions towards tackling the crisis including any increase in retail fuel prices. FPI flows, currency movement and oil prices will also be closely watched. Globally, labour market data from US, inflation data and global yields will be observed. 10-year Gsec closed at 7.01% on 30th April’26, 2 bps lower during the month. 10-year Gsec yield in the near term is likely to be in a range of 6.90%-7.15%. Spread of 10-year Gsec with corporate bond is near 60 bps and is likely to be in a range of 60-70 bps.