Indian Rupee: Policy trade-offs under energy shock – Societe Generale

Societe Generale analysts Kunal Kundu and Galvin Chia argue that India faces rising inflation and external risks as higher Oil prices and a weaker Rupee (INR) interact. They highlight the Reserve Bank of India’s (RBI) shift in stance, the risk of an inflation–FX loop, widening external deficits, and a narrowing India–United States (US) yield buffer that could justify calibrated tightening to stabilise the currency.

RBI weighs inflation, FX and Oil risks

"RBI kept the repo rate at 5.25% with a neutral stance in April 2026, despite prior 125 bps easing, acknowledging rising risks from energy prices, supply disruptions, and market volatility."

"The policy stance has shifted from “looking through” supply shocks to selectively “leaning against” risks to inflation expectations in a weaker global growth environment."

"Currency depreciation alongside the oil shock risks a self-reinforcing inflation–FX loop, where higher import costs lift inflation, tighten financial conditions, and amplify currency weakness."

"India’s high oil dependence (~90% imports) makes the currency a key transmission channel, with external balances deteriorating rapidly, as reflected in April’s $28.4bn trade deficit."

"The vulnerability has broadened to external financing, with the CAD likely to widen toward ~2% of GDP (and potentially beyond), increasing reliance on capital inflows and making depreciation more destabilising."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)