The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to announce additional measures to support the rupee while keeping interest rates unchanged at its June 5 policy meeting, according to a poll of 10 economists. Only two expect the central bank to raise rates. The RBI had left the repo rate unchanged at 5.25 per cent in April.
Economists said the RBI is likely to rely more on liquidity and regulatory tools to ease pressure on the rupee rather than resorting immediately to rate hikes. They also pointed to slowing capital inflows—including weaker foreign direct investment (FDI), foreign portfolio investment (FPI) and external commercial borrowing (ECB) flows—as an additional source of stress for the currency.
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Sakshi Gupta, principal economist, HDFC Bank, said the central bank could continue supporting liquidity through variable rate repo auctions and buy/sell swaps, and may even consider a temporary cut in the cash reserve ratio (CRR) to ease pressure on interest rates arising from the credit-deposit mismatch in the banking system.
Anubhuti Sahay, head of India Economics Research at Standard Chartered, said a June pause without additional external-sector measures could increase the risk of second-round effects on inflation and the rupee.“A June pause without measures to support the external sector can raise the risk of second-order effects on CPI,” Sahay said.
Barclays Predicts Rupee Slump
Analysts at Barclays said the RBI could consider measures such as smoothing importer demand for dollars, encouraging higher exporter dollar conversions, reintroducing FCNR deposits at concessional rates, relaxing ECB norms, easing hedging requirements for foreign investors, and expanding limits under the Fully Accessible Route (FAR) for bond investors.
“Still, while such measures may slow the pace of INR depreciation, we continue to see a weaker path for the currency to USD/INR 98.00 in the weeks ahead, albeit at a less rapid pace than witnessed in recent weeks,” the brokerage said in a recent report.
Geopolitical Crudeshocks
The rupee has come under sustained pressure since the escalation of the West Asia conflict in late February, largely due to a sharp increase in crude oil prices. Brent crude rose by as much as 60% to touch $118 per barrel, while the rupee weakened to a record low of 96.97 against the dollar last week before recovering on the back of aggressive RBI intervention and some moderation in oil prices. The currency has declined more than 6% so far this calendar year and closed at 95.29 on Monday.
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Economists warned that imported inflation risks are widening beyond crude oil to freight, shipping and broader commodity costs, raising concerns about second-round inflationary pressures. They also noted that a narrowing India-US bond yield differential could reduce the attractiveness of Indian assets for foreign investors if rupee depreciation continues.
Despite the currency pressure, economists said the RBI still has room to pause, given moderating domestic growth and headline inflation remaining within the central bank’s tolerance band. However, they expect the MPC to adopt a more hawkish tone in June, with greater emphasis on external-sector stability and upside risks to inflation.
Most economists expect any rate hikes to come only in the second half of FY27, with the immediate focus likely to remain on measures aimed at attracting dollar inflows and rebuilding foreign exchange reserves.
Kanika Pasricha, Chief Economic Adviser at Union Bank of India, expects three rate hikes beginning in the third quarter, but said the RBI’s immediate priority should be restoring confidence through measures such as ECB relaxations and changes to the FCNR framework.
“What matters more is confidence-building through verbal intervention, which has already begun, and policies to attract quick dollar inflows, which can be announced either during the policy meeting or earlier. In the short term, we need action to address a genuine balance-of-payments shortfall,” she said.
TOPICSRBIThis article was first uploaded on May twenty-five, twenty twenty-six, at fifty-nine minutes past ten in the night.