Commerzbank’s Charlie Lay highlights that the Reserve Bank of India kept its policy rate at 5.25% and signalled a preference to bolster the Rupee via capital inflow measures rather than tightening. A sizeable inflow package and stronger-than-expected GDP support INR, but the bank still sees vulnerability to high Oil prices and a firm US Dollar, with some Rupee weakness tolerated.

RBI supports rupee via inflow package

"Last Friday, the Reserve Bank of India (RBI) left the policy rate unchanged at 5.25% and maintained its neutral stance. This was despite rising inflation risks from higher oil prices, a weaker rupee, and expectations of a below-normal monsoon, which raises risks of higher food prices."

"RBI raised the inflation forecast for the current fiscal year (FY) 2026-2027 to 5.1% from 4.6% while lowering its GDP growth forecast to 6.6% from 6.9%. The key message was RBI's preference to support INR through capital inflow measures rather than higher interest rates."

"Together with the government, RBI unveiled a broad package to support the rupee, including tax exemptions on foreign investment in government bonds, expanded foreign access to sovereign debt, a subsidised FCNR(B) deposit scheme, and a concessional FX swap facility for state-owned firms. The measures are estimated to attract USD30-50bn of inflows over the next year."

"In FX, USD/INR fell sharply last Friday by 0.9% to just under 95.00 following the announcements. The measures should alleviate near-term balance of payments concerns and reduce pressure from portfolio outflows."

"Nevertheless, INR remains vulnerable to elevated oil prices and a firmer USD. While the latest measures could help slow the pace of depreciation, we suspect RBI will continue to tolerate some INR weakness."

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