India considers all options—including raising interest rates—to counter the sharp depreciation of the rupee.

The Reserve Bank of India (RBI) is facing severe pressure from the rupee’s rapid depreciation and has placed a range of unconventional measures—including interest rate hikes and overseas financing—on the table. This has triggered heightened market attention toward a potential shift in India’s monetary policy. According to Bloomberg, RBI Governor Sanjay Malhotra and other senior officials have recently held intensive internal meetings to discuss response options. This week, the rupee plunged to a record low of nearly 97 per U.S. dollar—the immediate catalyst for these emergency consultations. One option under consideration is taking action ahead of the scheduled June 5 monetary policy meeting, including the possibility of an unscheduled rate hike; the RBI previously made an off-cycle policy adjustment in May 2022. Following the news, markets reacted visibly: the rupee rose as much as 0.5% on Thursday to 96.38 per dollar, while the yield on 10-year government bonds fell by 3 basis points to 7.05%—having earlier dropped 6 basis points after the RBI announced liquidity injections, before partially reversing those gains. Depreciation speed exceeds expectations; policymakers adopt a tougher stance Sources familiar with the RBI’s decision-making process indicate that an increasingly strong consensus is forming within the policymaking circle: the pace of rupee depreciation has accelerated beyond expectations. Officials maintain that India’s economic fundamentals remain sound and its banking system functions normally—but this robustness has not been reflected in the exchange rate. One insider stated bluntly: “The central bank’s top priority right now is halting the depreciation—and the RBI stands ready to do whatever it takes to achieve that goal.” So far this year, foreign investors’ selling pressure on Indian assets has intensified continuously. Net outflows from foreign funds in the Indian equity market have already surpassed last year’s record high of $19 billion. Meanwhile, the interest-rate differential between India and the U.S. has narrowed to its lowest level in over a decade, diminishing the appeal of Indian bonds to foreign investors.

RBI’s rupee rescue depletes reserves: foreign exchange reserves drop by $50 billion; $200 billion in forward-dollar liabilities become a ticking time bomb.

The strain on the spot market is merely the tip of the iceberg. The RBI’s net short position in U.S. dollar forwards has reached $200 billion—meaning the central bank has assumed massive future dollar delivery obligations in the forward market. At the same time, the banking system faces an additional $35 billion in forward-dollar exposure stemming from interest payments due on non-resident Indian (NRI) dollar deposits—a figure estimated by Ananth Narayan, an analyst at the Observatory Group and former banker and securities regulator. This structural accumulation of dollar liabilities means every spot-market intervention further exacerbates forward-payment pressures. This round of NRI dollar deposit mobilization totals $133 billion—more than five times the $26 billion raised in 2013. Yet unlike in 2013, this inflow has failed to stabilize reserves; instead, reserves continue to decline. Although banks have transferred their exchange-rate risk to the RBI, they must still source dollars independently to pay interest to NRI depositors—creating additional forward-dollar demand. Should market pessimism persist, the rollover cost of forward positions will surge sharply, further eroding the RBI’s policy space. Administrative measures escalate comprehensively—but only treat symptoms, not root causes According to an article by WallStreetCN, since October 12, 2026, the RBI has opened a dedicated window to directly supply foreign exchange to three state-owned refiners—Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Limited (HPCL), and Bharat Petroleum Corporation Limited (BPCL)—through designated banks, completely bypassing the spot market. Goldman Sachs emerging markets strategists Rishi Radia and Lu Sun noted in their report that these three refiners’ annual dollar requirements amount to approximately $120 billion; the largest daily buyers of dollars in the spot market—previously driving rupee depreciation—have now vanished from that market. Yet Goldman Sachs candidly stated: “The underlying dollar demand remains unchanged—it is simply being met using the RBI’s foreign exchange reserves.” While pressure on the rupee in the spot market eases, the cost is an accelerated depletion of reserves—each barrel of crude oil imported at around $100 per barrel directly consumes foreign exchange reserves. Meanwhile, the RBI has revived the derivatives controls briefly deployed during acute stress in April: it has banned the rebooking of canceled rupee–foreign-exchange derivative contracts; slashed the permissible size of foreign-exchange derivative positions that can be established without prior proof of actual exposure—from $100 million down to $5 million, a 95% reduction; and imposed a 20% cash margin requirement on hedging purchase contracts exceeding $2 million. Goldman Sachs characterized the final measure as a “de facto increase in the cost of dollar-hedging.” Notably, a clear loophole exists in these controls: offshore independent banks not authorized by the RBI are not directly bound by these requirements. Goldman Sachs expects “some hedging demand may therefore shift to the NDF (non-deliverable forward) market,” and tightening in the domestic market could accelerate the migration of hedging activity to offshore venues. Lessons from 2013: the cost of administrative intervention The RBI’s current approach closely mirrors its crisis response during the 2013 ‘taper tantrum,’ but historical lessons bear sobering relevance. In 2013, a panicked RBI similarly resorted frequently to administrative tools—and in one instance hiked the overnight lending rate by 200 basis points in a single move, pushing short-term rates up to 10.25%.

PIMCO Expects RBI to Raise Rates by 75bps Amidst Food and Energy Inflation Risks

15 hours ago

PIMCO anticipates further RBI interest rate hikes totaling 75 basis points driven by inflation risks from food and energy prices, noting Brent crude near $105 impacts rupee stability.

reuters

2026-10-14

PIMCO Expects RBI to Raise Rates by 75bps Amidst Food and Energy Inflation Risks

PIMCO Expects RBI to Raise Rates by 75bps Amidst Food and Energy Inflation Risks

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