DBS Group Research economist Radhika Rao notes that the Indian Rupee has appreciated from near 97.00 to the mid-95.00 area on hopes of easing West Asia tensions, lower Oil prices, and central bank support. She highlights RBI Governor Malhotra’s comments on Rupee undervaluation, a record RBI dividend to the FY27 Budget, and limited fiscal slippage risks.

Rupee supported by policy and flows

"Hopes of a resolution to the West Asia tensions leading to lower oil prices, along with central bank intervention and expectations of a rate hike, have supported rupee’s appreciation over the past few sessions, from near 97.00 low to mid-95.00 on Monday, up a cumulative ~1.5%."

"RBI Governor Malhotra’s observation that the rupee appeared undervalued signalled a notable shift from the traditionally restrained approach toward commenting on currency valuation."

"Add to this, the inflation rationale has also gained credibility amid successive pump price increases (~7% over the past two weeks), a pickup in food, impact of prevailing heatwave conditions and rising business inflation expectations, all of which point to mounting underlying price pressures."

"In the absence of a clear risk of headline inflation spilling over into the core and signs of unanchored inflationary expectations, the central bank is likely to view the energy shock as a supply-side price catalyst and defer tightening policy at the upcoming meeting."

"An argument can, nonetheless, be made on the need to tighten policy in 2HCY26 if the conflict continues, to attract rate sensitive flows."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)