India's April CPI Below Expectations, Central Bank Likely to Hold Rates Steady

Overview

This report analyzes India's April 2026 Consumer Price Index (CPI) data and its implications for monetary policy. The data shows headline inflation at 3.5% and core inflation at 3.4%, both below consensus and Nomura's forecasts, marking the 15th consecutive month below the Reserve Bank of India's (RBI) 4% target. Despite external risks like the Iran war and potential El Niño, fiscal defense measures and weak corporate pricing power have kept inflationary pressures moderate. Nomura expects the RBI to hold rates steady for the remainder of 2026. Policy focus is shifting from pure monetary tightening to non-monetary measures, including restrictions on non-essential imports, to address balance of payments (BOP) concerns.

Core views

Inflation data came in below expectations across the board, with core pressures remaining contained. India's April CPI rose slightly to 3.5% YoY from 3.4% in March, below the consensus expectation of 3.8%. Food and beverage inflation climbed to 4.0% but remained below Nomura's 4.5% forecast; core inflation held steady at 3.4%; 'super core' inflation (excluding fuel, diesel, and precious metals) was just 2.2%. Food items like cereals, meat, and vegetables generally weakened, while fish and edible oils rose due to global price trends. Within core categories, hotels and restaurants saw sharp increases due to commercial LPG shortages, but education, healthcare, and housing showed slower momentum. External shocks yet to materialize as fiscal buffers hold. Despite concerns over energy prices from the Iran war and El Niño-related drought risks, April data showed limited impact. This reflects government controls on petrol, diesel, and LPG prices, with oil marketing companies absorbing some cost shocks. Companies, wary of weak demand, have hesitated to fully pass on input cost pressures to consumers, even at the fiscal year's traditional April price reset period. Inflation trajectory points higher, but RBI likely to stay patient. Nomura expects inflation to rise in coming months as firms gradually pass costs, potential fuel price hikes to conserve forex, and adverse weather risks materialize. Headline inflation could exceed 4% by July, averaging 5.4% in Q4 2026 due to base effects. However, even a modest fuel price increase (e.g., ₹5/liter) would have limited direct impact (~25-30bps), and inflation expectations have fallen from 11-12% in 2022 to ~8.5% currently. Thus, Nomura believes the RBI will hold rates in 2026, focusing more on inflation momentum and second-round effects rather than reacting excessively to one-off shocks. Policy pivot toward non-monetary tools for BOP issues. Given current account deficit pressures, the government may implement non-monetary measures like curbs on non-essential imports (gold, electronics), tighter remittance rules, macroprudential tools (e.g., import hedging requirements, export dollar repatriation), or even diaspora bonds. These aim to safeguard forex reserves and energy supplies rather than directly suppressing demand via rate hikes.

Analysis framework

Nomura employed a standard macro inflation decomposition and policy response framework. First, by breaking down CPI subcomponents (food, core, super core), it identified inflation drivers and outliers to assess breadth and persistence. Next, incorporating geopolitical (Iran war) and climatic (El Niño) factors into scenario analysis, it evaluated external shock transmission to domestic prices, especially how fiscal interventions (e.g., fuel subsidies/price controls) disrupt this. Finally, integrating inflation outlooks with the RBI's policy function—considering not just absolute inflation but also expectations, BOP constraints, and non-monetary policy alternatives—it concluded rates would stay unchanged. This approach highlights that in open economies, monetary policy isn't the only tool against inflation, particularly when external imbalances loom.

Methodology notes

• Macroeconomic frameworkPhillips curve

  Inflation-Output/Demand Relationship

  The report implicitly applies Phillips Curve logic to micro pricing behavior by analyzing how demand concerns deter firms from passing costs to consumers.

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  CPI Subcomponent Contribution Analysis

  The report dissects headline inflation into food, core, and super core categories, further detailing cereals, fuel, hospitality, etc., to pinpoint inflation sources and drivers.

• Event Gaming & Behavioral FinanceExpectation Gap/Management

  Inflation Expectations' Policy Impact

  The report notes current inflation expectations (~8.5%) are far below 2022's hiking cycle levels, suggesting stable expectations afford the RBI greater policy patience without overreacting to short-term fluctuations.

Key data

• April Headline CPI YoY3.5%Up from 3.4% in March but below consensus (3.8%) and Nomura's estimate (3.7%)
• April Core Inflation YoY3.4%Unchanged from March, below Nomura's 3.5% forecast
• April Super Core Inflation YoY2.2%Core ex-fuel, diesel, and precious metals, up slightly from 2.1% in March
• FY27 Headline Inflation Forecast~4.7%Assuming no fuel price hikes, below prior official estimate of 5.0%
• Potential Fuel Price Hike Impact+25-30bpA 5% rise in petrol/diesel prices could lift headline inflation by 25-30bps

Impact & implications

For India's macroeconomy, mild inflation affords the RBI room to maintain accommodative policy, supporting growth. However, BOP pressures may compel administrative/fiscal trade and capital flow interventions, potentially hurting import-reliant sectors (electronics, gold jewelry) and individuals needing overseas remittances. Investors face low near-term rate risk but should watch for structural friction and sector-specific regulatory risks from non-monetary measures.

Risks

• Potential 'super' El Niño and rainfall deficits threatening crop output and food inflation
• Government sharply raising fuel prices, driving inflation above expectations and triggering second-round effects
• Excessive corporate margin pressure forcing aggressive consumer price pass-through
• Escalating global geopolitical conflicts causing volatile energy/commodity prices

What to watch

• Whether and by how much the government raises petrol/diesel prices
• Implementation of non-essential import curbs (gold, electronics)
• Tightening of remittance rules and diaspora bond issuance plans
• Monsoon rainfall patterns and actual food price impacts
• RBI's emphasis on inflation momentum and second-round effects in upcoming meetings