RBI considers rate hike as rupee hits new low
What's the story
The Reserve Bank of India (RBI) is exploring various measures to stabilize the rupee, including an interest rate hike. The move comes after the Indian currency hit a new low of nearly ₹97 against the US dollar this week. RBI Governor Sanjay Malhotra and other top officials have been holding internal meetings to discuss possible actions in response to this development.
Potential strategies
Interest rate hike and NRI deposit scheme under consideration
Among the strategies being considered is an interest rate hike, with the next monetary policy decision scheduled for June 5. However, it's worth noting that the RBI has made out-of-cycle adjustments in the past, such as in May 2022. Other measures include raising dollars through a deposit scheme for non-resident Indians (NRIs) and possibly issuing a sovereign dollar bond, subject to government approval.
Foreign currency inflows
Proposed measures reminiscent of 2013 taper tantrum response
The proposed measures are similar to those taken during the 2013 taper tantrum period. Back then, India had introduced a deposit scheme for NRIs through local banks to encourage foreign currency inflows. The RBI estimates these schemes could attract as much as $50 billion this time around, significantly higher than the previous estimate of about $30 billion.
Policy response
Policymers acknowledge faster rupee fall
Policymakers have acknowledged that the rupee is falling faster than expected. They believe India's economic fundamentals are strong and the banking system is stable, but this strength isn't reflected in the exchange rate. The RBI's top priority now is to stop the rupee's depreciation, with officials saying they are willing to do whatever it takes to achieve this goal.
Market impact
Rate hike could attract foreign bond inflows
A rate hike could attract foreign bond inflows by widening the interest rate differential between the US and India, which has narrowed to a decade low. Investors have been selling Indian assets this year, with foreign fund outflows from stocks in 2026 already exceeding last year's record of $19 billion. The RBI's six-member monetary policy committee will meet from June 3-5 to discuss these issues further.