India's Rupee Under Pressure, RBI Considers Rate Hike and Other Measures

Rupee has remained under pressure since the Middle East conflict erupted in late February, falling nearly 6% and hitting multiple record lows against the US dollar. The currency is now inching closer to the 97-mark against the greenback as tensions involving the US, Israel and Iran continue to weigh down global markets. With rupee’s decline gathering pace, the Reserve Bank of India is considering a range of measures to help stabilise the currency, people familiar with the matter said. Senior RBI officials, including Governor Sanjay Malhotra, have held several internal meetings in recent days to review possible steps to contain the slide, Bloomberg reported. One of the key measures being examined is a possible interest rate increase, one person said. While the RBI’s next scheduled monetary policy announcement is due on June 5, the central bank has previously taken unscheduled action, including an out-of-cycle move in May 2022. Officials are also considering steps to raise dollar inflows from overseas investors. According to another person familiar with the discussions, cited by Bloomberg, these include a foreign currency deposit scheme for non-resident Indians as well as the potential issuance of a sovereign dollar bond. Any move related to a sovereign bond would require a government decision, the person said. The discussions have drawn comparisons with the steps India took during the 2013 taper tantrum period, when authorities launched a deposit scheme through local banks to attract foreign currency from non-residents. One of the people said the RBI believes a similar programme could mobilise as much as $50 billion this time, compared with around $30 billion raised earlier. People familiar with the central bank’s thinking said policymakers now believe the rupee’s depreciation has been sharper than initially expected. They said officials continue to see India’s macroeconomic fundamentals and banking system as strong, even though that resilience is not currently visible in the currency market. According to one of the people, preventing further weakness in rupee has become the central bank’s immediate priority, with policymakers prepared to use all available options if needed. A rate hike could support foreign bond inflows by increasing the yield gap between India and the United States, which has fallen to its narrowest level in more than ten years. Foreign investors have continued to pull money out of Indian assets in 2026, with equity outflows already crossing last year’s record level of $19 billion. The RBI’s six-member monetary policy committee is scheduled to meet from June 3 to June 5. The benchmark policy rate has remained unchanged at 5.25% so far this year, though economists largely expect rates to move higher in the coming months amid rising inflation. Earlier this week, the RBI announced a $5 billion swap auction to inject liquidity into the banking system and strengthen its near-term dollar reserves. People familiar with the matter said additional swap auctions remain a possibility.