Commerzbank’s India section notes September CPI at 5.5% year-on-year, above August and near breaching the RBI’s target band, with risks skewed to the upside from Oil, INR weakness and El Niño. The authors flag RBI’s recent FX measures that strengthened the Indian Rupee and suggest USD/INR could ease back toward the 94–96 range in the near term as hedging costs rise for importers.

RBI actions underpin Indian Rupee

“September CPI inflation rose to 5.5% yoy (Bloomberg consensus: 5.6%) vs 4.8% in August, the highest reading since December 2024.The increase was led by higher food prices, but there were also signs that price pressures could be broadening out. Headline inflation is expected to breach the upper bound of the Reserve Bank of India’s (RBI) 2-6% target range as early as October.”

“Last week, RBI projects inflation to average 6.0% in Q4 2026 and raised the forecast for fiscal year 2026-2027 to 5.2% from 5.0% previously. Overall, inflation risks are broadening beyond supply-side factors and remain tilted to the upside due to elevated oil prices, INR weakness and weaker rainfall amid the El Niño weather phenomenon.”

“On monetary policy, upside risks to inflation leaves the door open for RBI to hike by another 25bp to 5.75% at the next meeting on 4 December and possibly another 25bp in Q1 2027. RBI has signalled a calibrated tightening bias.”

“In FX, USD/INR fell nearly 1.0% to 95.78 yesterday following RBI measures aimed at supporting the INR. These included a special USD facility for state-run oil marketing companies and a reduction in the threshold for INR derivatives without an underlying asset to USD5mn from USD100mn.”

“RBI also introduced a new Foreign Exchange Risk Reserve (FERR), requiring 20% of the notional value of each FX derivative transaction above USD2mn to be held with the central bank. The measures could support the INR while raising hedging costs for importers.”

“We could see USD/INR ease back to the 94-96 range near term.”