Outlook for the Month of June’26

Economy Review

The key events in the month were –

Domestic Factors –

a) Trade Deficit – India’s trade deficit increased to $28.4bn in April’26 from $20.6bn in March’26 due to sharp rise in gold and oil import bill.

b) Manufacturing PMI – Manufacturing PMI touched a 3 month high in May’26 at 55.

c) Petrol and Diesel Pricesetrol and Diesel Prices – Retail prices of petrol and diesel prices have been increased by Rs7.5/liter since 15th May’26.

d) Customs Duty Hike – Center has increased the basic customs duty on gold and silver from 5% to 10%.

e) IMD – IMD has projected a below-normal monsoon for India, with rainfall at 90% of the long period average, with El Nino weather pattern developing in June and July.

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 due to US blockade.

b) Crude Oil – Brent crude oil prices remain elevated in the range of $90-$100/bbl as global oil supply issue remains constrained.

Domestic Macro Economic Data

Inflation – India’s CPI inflation picked up marginally to 3.5% YoY in April’26 vs 3.4% YoY in March’26, a 13-month high. This continues to be driven by food inflation and precious metal prices. India’s WPI inflation has sharply spiked to 8.3% in April’26 from 3.9% in March’26.

Outlook for Equities
Indian equity markets remained choppy in the month of May’26. Nifty declined 1.9% over the month on uncertainty on US-Iran peace deal. Crude oil remains to be elevated at over $90/ bbl and rupee continues to lingers at 95 against the dollar. Midcap and smallcap indices have outperformed the largecap and gained 3.2% and 0.7% respectively.

FY26 fiscal deficit came in at 4.4% of GDP, inline with the revised estimates, on lower tax receipts and lower GDP growth. IMD has projected a below-normal monsoon for India. Center has increased the basic customs duty on gold and silver from 5% to 10% to curb imports. Retail prices of petrol and diesel prices have been increased by Rs7.5/liter since 15th May’26 on rising crude oil prices. FIIs sold $4.9bn worth of Indian equities whereas DIIs bought $8.7bn of equities during the month of May’26.

The Nifty-50 registered a modest 5% EPS growth in FY26. India’s sharp underperformance in FY26 and record FII outflows sets a favorable base for Indian equities. Nifty is currently trading at ~16.8x 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 US-Iran peace deal and high commodity prices.

Outlook for Debt
May has been eventful as several scenarios which were anticipated came into being. Government on 25th May’26 announced a further hike in retail prices of petrol and diesel taking the cumulative price hike to around Rs 7.5/litre each for petrol and diesel. With the latest revision, petrol and diesel prices are at their highest levels since May’22. IMD has forecast a below normal monsoon, 90% of the long-period average. IMD expects El Nino conditions to intensify through the monsoon period.

RBI approved transfer of Rs 2.87tn as surplus to the central government for FY26. The Contingent Risk Buffer (CRB) has been reduced to 6.5% (from 7.5% earlier). With the revised risk buffer, RBI required a provisioning of around Rs 1.1tn for FY26. RBI’s balance sheet increased 20.6% to Rs 92tn. RBI’s income in FY26 increased to Rs 4.3tn driven by 27% growth in foreign income and 26% growth in domestic income. Durable liquidity fell to Rs 2.7tn as of 15th May’26, due to continued FX intervention and CIC leakage. Liquidity surplus has also moderated to Rs 1.4tn.

GFD/GDP in FY2026P was maintained at 4.4%, in line with FY2026RE, driven by lower than budgeted receipts and expenditure. In FY27, the center’s fiscal position remains under pressure with lower excise duty collections and higher subsidies. April IIP growth was 4.9% yoy based on the new IIP index (base year- FY23), driven largely by manufacturing growth. April CPI inflation continued the uptrend at 3.5% yoy driven by higher food inflation. Core inflation was at 3.7%. WPI inflation for April was at 8.3% yoy, the highest level seen in 42 months, driven by higher fuel prices. India’s goods trade deficit widened to $28.4 bn in April led largely by oil imports rising. Services trade surplus in April at $20.6 bn remained steady.

Global markets continued to be guided by West Asia war related headlines and brent oil prices. Higher inflation has returned to most global economies with pressure seen on input prices leading to higher output prices. These are attributed to energy prices as well as supply chain disruptions. Pricing of rate hikes have begun and currently markets are pricing in an over 50% chance of rate hike by FOMC by December 2026 and 3 rate hikes by ECB during the year. Bank of Japan is also expected to hike rates in June. Emerging markets such as Indonesia, Philippines and Sri Lanka have hiked key rates. US 10 year yield climbed to 4.70 during the month but closed higher by 6 bps at 4.45 towards end May. Brent oil dropped by 19% during the month to $92.05/bbl.

In the near term, markets await RBI MPC, GDP data, Bloomberg Global aggregate index inclusion related news, resolution of West Asia crisis, path of CPI data and further government actions. 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. New 10-year Gsec closed at 6.98 on 29th May’26. Old 10-year Gsec remained flat 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 70 bps and is likely to be in a range of 70-80 bps.