They expect the central bank to manage currency through forex market interventions and non-policy measures rather than monetary tightening
Mumbai: Despite the steep depreciation of the Indian rupee, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is unlikely to raise interest rates solely to defend the currency, said economists. They expect the central bank to manage currency through forex market interventions and non-policy measures rather than monetary tightening.
The Indian rupee has depreciated recklessly by Rs 5 per dollar (from Rs 90 to Rs 95) in just 152 days. It reached 96.83 against the US dollar on May 20, 2026. During the calendar year to date the rupee is down by 5.5 per cent against the dollar.
The six member MPC led by governor Sanjay Malhotra, began its three day deliberations on Wednesday and would be announcing the outcome on Friday. The meeting comes amid heightened uncertainty due to global conflicts, rising crude prices, sharp rupee depreciation, slowing growth, foreign portfolio investor outflows, and monsoon risks. The rupee has been Asia’s worst performing currency as foreign investors have dumped stocks worth $ 22.7 billion since the onset of the West Asia war. For FY27 YTD foreign investor outflow is at $10.6 billion.
Says Dipanwita Mazumdar, economist at Bank of Baroda, “Currently the gap between India and US 10 year yield is maintained at 255 basis points. Thus, one logic could be for RBI to defend the currency by raising rates and attracting higher capital flows. However, currency
management through rate action does not directly fall under the ambit of monetary policy. Hence, we expect RBI to maintain status quo on rates and let INR find its own desirable level. RBI’s intervention through spot and forward purchase/sell is likely to continue.”
On Wednesday the rupee extended its losing streak for the second consecutive session depreciating by 44 paise to close at 95.70 against the US dollar. The currency remained under pressure due to persistent capital outflows, concerns over US President Donald Trump’s tariff proposals and rising crude oil prices amid escalating geopolitical tensions in the Middle East.
The dollar index rose on safe haven buying after Iran reportedly attacked US bases in Kuwait while the US also attacked Iran’s Qeshm thus violating the ceasefire which was still under discussion. The Brent oil prices rose upto $ 97.70 per barrel. Indian equities fell by 1.25 per cent thus keeping the dollar bid on rupee intact.
The MPC has cut the policy repo rate by cumulative 125 basis points in 2025 and maintained a hold on rates in February and April meetings.
The RBI in its recent Annual Report 2026 has pegged the domestic economy to be resilient and grow by 6.9 per cent for 2026-2027, against the backdrop of a moderate global growth while retail inflation at 4.6 per cent with risks tilted to the upside. In 2025-2026, India’s economy is estimated at 7.6 per cent against the backdrop of a steady global growth amidst multiple headwinds, up from 7.1 per cent in 2024-2025.
Since the last MPC meet in April, the macro backdrop has evolved in several important ways. Brent briefly surged to as high as $ 126/bbl before retracing 25 per cent to $ 94/bbl currently.
The most notable change since the last policy has been the hike in petrol and diesel prices to consumers with pump prices cumulatively rising Rs7.5/litre and CNG price hikes of Rs4-7/litre implying a direct inflation impact of ~40 basis points according to Emkay Global report.
Central banks across emerging markets are turning more hawkish as price pressures continue to build.
