India’s April Consumer Price Index (CPI) rose 3.5% year-on-year, below the 3.8% Bloomberg consensus and up from 3.4% in March. This was the fifteenth straight month below the Reserve Bank of India’s 4% mid-point target.
Inflation averaged 3.2% in the first four months of the year, versus the RBI’s 4.6% forecast for fiscal year 2026-2027 (FY2026-2027). Government measures have helped limit wider price pressures linked to higher global oil prices.
Inflation is expected to edge up as fiscal room to maintain relief measures narrows and some measures are normalised. Prime Minister Narendra Modi urged people to cut electricity use and rely more on public transport after strong state election results.
Food inflation rose to 4.0% year-on-year in April from 3.7% in March, with spring harvest yields partly hit by heavier-than-expected rainfall. Food prices may stay elevated during a hotter, drier summer, while supply chain disruptions add to fertiliser costs.
Liquefied petroleum gas (LPG) inflation eased to 3.0% from 5.3%, with consumer price caps unchanged but higher commercial prices as crack spreads widened. Transport fuel inflation stayed at 0.1% year-on-year.
Core CPI rose 3.7% year-on-year, unchanged from March, partly linked to higher precious metal prices. Excluding jewellery, inflation was 2.2% versus 2.1% previously.
We’ve seen inflation stay below the RBI’s 4% target for fifteen months, with the April reading coming in at a lower-than-expected 3.5%. However, this low inflation is unlikely to last much longer. The government is signaling an end to costly relief measures, which means prices could start climbing soon.
This outlook suggests we should be positioning for higher interest rates in the coming weeks. We could look at paying fixed on Overnight Index Swaps (OIS), as the market will begin pricing in future rate hikes from the Reserve Bank of India. Shorting 10-year government bond futures is also a direct play, as bond prices will likely fall if the central bank turns more hawkish.
We saw a similar situation back in 2022-2023, when the RBI rapidly increased the repo rate by 250 basis points to control surging inflation. That historical precedent suggests the central bank will not wait long to act once inflation starts trending up decisively. This makes forward rate agreements betting on higher rates in the third quarter of 2026 seem attractive.
The risk from rising food prices is particularly high, with April’s food inflation already ticking up to 4.0%. Recent forecasts from the India Meteorological Department (IMD) predicting a hotter and drier summer support this view, and early May wholesale data already shows a 7% week-on-week spike in onion prices. This reinforces the case for a more defensive stance, as food inflation heavily influences headline CPI.
The prospect of rate hikes could also create headwinds for the stock market. We might consider buying Nifty 50 put options to hedge against a potential market correction. While higher rates could initially strengthen the rupee, persistent inflation would be a long-term negative for the currency.
