Core Inflation

UTI Mutual Fund August 2026 Fixed Income The UTI fixed income August 2026 briefing turns on a single distinction: strip gold and silver out of India’s core inflation and it is running near 2 to 2.5%, not 4%. That’s why the RBI can remain on pause. That’s why the short end of the curve is supported. And that’s why the 1–3 year part is the trade — a liquidity call, not a rate call. UTI fixed income August 2026: the core reframe and the short-end setup This month’s UTI fixed income August 2026 briefing comes from Anurag Mittal, Head of Fixed Income at UTI Mutual Fund. Read alongside the UTI July fixed income call — which framed the setup as “liquidity, not rate cuts” — and this month’s Kotak August outlook, which also flagged FCNR-B flows as the mechanism to watch. Where equity AMCs are debating positioning, UTI fixed income makes the sharper structural read: the RBI is being consistent, not complacent, and the market is under-pricing what that means for the short end. SHORT END (1–3Y) Liquidity Call LONG END Avoid RBI POLICY Pause · Neutral FCNR FLOWS $50–60B Still to Come Summary The UTI fixed income August 2026 read starts with a distinction most commentary is missing: headline core inflation prints above 4%, but gold and silver sit inside that number. Strip them out and underlying core is running near 2 to 2.5% — well below the RBI’s 4% target. That’s why the RBI held repo at 5.25% unanimously with a neutral stance, lowered its FY27 inflation forecast by 10 bps to 5%, and raised growth from 6.6% to 6.7%. Critically, it clarified it will not sterilise the FCNR liquidity — unlike 2013 — because the second half of the year brings natural currency leakage anyway. The FCNR window has already brought in about $37 billion, and historically 55–60% of such flows arrive in the final month — so at the current run rate they can comfortably cross $80 billion, with another $15–20 billion expected through the ECB window. That’s $90–100 billion in total, with $50–60 billion still to arrive. A monetary pause plus easy liquidity is about as good a combination as the short end of the curve ever gets. The 1–3 year part of the curve is the call — a liquidity call, not a rate call. Avoid the long end. The market has already priced ~60 bps of the expected 50–75 bp hike cycle; don’t let the hike headline frighten you out of the trade. The detail The core-ex-precious-metals reframe — 2–2.5%, not 4% Headline core inflation is above 4%, but gold and silver are inside that number. Strip them out and underlying core runs near 2 to 2.5% — well below the RBI’s 4% target. Until that figure moves towards 3 to 3.5%, the bar for a hike stays high — whatever headline CPI prints. The RBI is being consistent, not complacent. It cut nothing last year when inflation averaged 2% on soft food prices; it will not hike now simply because inflation runs at 5% on oil and food. It is waiting to see whether the shock generalises into core. The bond market rallied after the policy — which tells you the communication landed. The named risks — oil inventory speed, global yields, trade deficit, monsoon distribution Oil is the biggest. US commercial inventories including the strategic petroleum reserve have fallen roughly 26% below average to near a five-year low — and the speed matters more than the level. After the Russia-Ukraine shock in 2022 it took about 13 months of reserve releases to produce a fall of that size; this time it has happened in six. That depletion is a large part of why oil didn’t spike despite the Strait of Hormuz closing — the cushion is now spent, and inventory eventually has to be refilled. Do not assume low oil persists. Bloomberg commodity index rose 7% MoM; oil crossed $80 on renewed US-Iran escalation. Global yields rose almost everywhere — Germany 35 bp, UK 29, Brazil 44 — with only China falling on its growth slowdown. Unusual reason: heavy bond issuance from hyperscalers is crowding out sovereign borrowing rather than the other way round, because the pool of capital is finite. Trade deficit remains elevated — about $28 billion in May and $30 billion in June — driven by non-oil non-gold imports of electronics and capital goods. Once the FCNR and ECB windows close, that becomes the live question for the rupee. Monsoon is fine in aggregate but risky in distribution. North-east and east India are at a 30% deficit, southern India at 23% — that’s where regional price spikes come from. Watch distribution, not the national average. FCNR flows — the most underappreciated positive The FCNR window has already brought in about $37 billion against real scepticism that the flows would come at all. Historically 55–60% of such flows arrive in the final month — so at the current run rate they can comfortably cross $80 billion, with another $15–20 billion expected through the ECB window that runs to December. Call it $90–100 billion in total, leaving $50–60 billion still to arrive. There’s a good reason the market hasn’t fully noticed. Liquidity has not visibly improved yet because the RBI delivered roughly $11 billion against its forward book — cutting its one-month short position from $20 billion in May to $9 billion in June — and intervened in the currency market through July. That’s a timing lag, not an absence. With delivery done and intervention easing, the liquidity should now start to show. The 1–3 year liquidity call — the anchor of the setup The 1 to 3 year part of the curve is the call — and it is a liquidity call rather than a rate call. A monetary policy pause combined with $50–60 billion of incoming flows is precisely the setup that anchors the short end. As those flows reach the banking system, banks need to issue