Top News

Even as the Indian rupee slides to record lows amid rising global energy prices and the ongoing Iran conflict, the Reserve Bank of India (RBI) appears reluctant to use aggressive interest rate hikes as its primary defence mechanism.

According to sources cited by Reuters, the central bank continues to prioritise inflation management and growth concerns over sharp monetary tightening aimed solely at supporting the currency.

The stance puts the RBI somewhat at odds with market expectations, where traders have increasingly begun pricing in rate hikes in response to the rupee’s sharp fall.

Rupee Under Pressure Amid Oil Shock

The Indian rupee has weakened significantly since the conflict involving Iran escalated earlier this year.

The currency has fallen nearly 6 per cent since late February and slipped to a record low of around 96.96 against the US dollar on Thursday.

The pressure on the rupee has largely been linked to soaring crude oil prices and broader global risk aversion.

India, being heavily dependent on imported crude oil, faces additional pressure whenever global energy prices surge sharply.

Why RBI Is Hesitant About Rate Hikes

Despite the sharp currency depreciation, sources familiar with the RBI’s thinking told Reuters that policymakers do not believe interest rate hikes are the most effective tool to defend the rupee.

One source said there did not appear to be an urgent need for the central bank to move towards rate increases.

Officials reportedly fear that smaller rate hikes may do little to stabilise the currency while simultaneously hurting domestic demand and economic growth.

A more meaningful defence of the rupee, according to another source, would require much steeper rate increases, something policymakers appear unwilling to pursue at this stage.

Other Measures Still On The Table

Instead of relying solely on interest rates, the RBI is understood to be evaluating alternative measures to support the rupee.

Reuters earlier reported that options under consideration include special dollar deposit schemes for non-resident Indians (NRIs) and tax-related measures aimed at attracting debt investors.

Reports indicated that discussions on these steps are continuing in coordination with the government.

However, officials also suggested that not all possible measures may eventually be implemented.

Markets Betting On Tightening

Financial markets, however, appear to be positioning for tighter monetary policy.

Interest rate swap markets are currently pricing in at least 40 basis points of rate hikes by the RBI over the next three months and more than 100 basis points over the next year.

The expectations reflect growing concern that rising oil prices and a weaker rupee could eventually push inflation significantly higher.

Inflation Risks Back In Focus

While the RBI may not be prioritising the rupee directly, inflation risks are clearly moving back into focus.

An oil price shock combined with a weakening currency could increase imported inflation in India’s economy, especially given the country’s dependence on energy imports.

According to one source cited by Reuters, consumer price inflation is now moving closer to 5 per cent or slightly above.

That would still remain within the RBI’s official tolerance band of 2-6 per cent, although it would move further away from the central bank’s medium-term target of 4 per cent.

India’s retail inflation stood at 3.48 per cent in April.

At the wholesale level, inflation pressures are already significantly stronger. Wholesale inflation surged to 8.3 per cent last month, driven largely by higher fuel and energy prices.

However, officials believe the impact on consumers has so far remained relatively contained because fuel cost increases have not been fully passed on to retail prices.

Growth Concerns Complicate RBI’s Calculations

Apart from inflation, policymakers are also watching economic growth closely.

According to one source, the RBI’s April projection of 6.9 per cent GDP growth for the current financial year may eventually need to be revised lower.

Officials fear that aggressive monetary tightening at a time of slowing global growth could add further pressure on domestic demand.

That concern appears to be influencing the RBI’s cautious stance even as the rupee remains under pressure.

June MPC Meeting In Focus

Attention is now shifting towards the RBI’s next monetary policy decision scheduled for June 5.

The central bank reportedly held consultations with economists on Thursday as policymakers assessed the evolving macroeconomic situation.

According to two people familiar with the discussions, Governor Sanjay Malhotra asked whether the lagged impact of policy decisions could justify a pre-emptive rate hike.

However, officials did not provide any clear signal on the direction of the upcoming policy move.