RBI Explores Rate Hike, Dollar Bonds to Stabilize Weakening Rupee

The Reserve Bank of India (RBI) is considering all of its available options to stabilise the rupee, including an interest rate hike, more currency swaps and raising dollars from investors overseas, according to people familiar with the matter.

Top RBI officials, including Governor Sanjay Malhotra, have held a series of internal meetings to discuss the options available after the rupee plunged to a fresh low of almost 97 to a dollar last week, the people said, asking not to be identified because the discussions are private. One of the options on the table is raising the interest rates, one person said. The next scheduled monetary policy decision is on 5 June, although the RBI has previously made an out-of-cycle adjustment in May 2022.

Other measures include raising dollars overseas through a deposit scheme for non-resident Indians and selling a sovereign dollar bond, another person said. The latter would be decided by the government, the person said. Bonds swung to losses. The 5-year yield rose as much as 14 basis points to 7.01%, while the 10-year yield rose as much as five basis points to 7.13%. The rupee gained 0.5%, outperforming Asian peers.

The measures under consideration mirror some of those taken during the 2013 taper tantrum period. India provided a deposit scheme for non-residents through local banks at the time to spur foreign currency inflows. The RBI estimates the deposit schemes could draw as much as $50 billion this time around, according to one of the people, compared with about $30 billion previously.

The RBI could also issue more currency swaps, people familiar with the matter said. Last Wednesday, the RBI announced a $5 billion swap auction to infuse liquidity in the banking system and also boost the RBI’s dollar reserves in the immediate term. The RBI didn’t respond to an email seeking further information.

“RBI will need to go big,” Rajiv Batra, JPMorgan’s co-head for global emerging markets strategy, said in an interview with Bloomberg TV’s Haslinda Amin. “Rather than using one single measure, you should use a plethora of measures, so that the hit is being taken across all the three asset classes,” referring to equities, rates and the currency.

There is an increasing recognition among policymakers that the rupee is tumbling faster than anticipated, according to the people, who are familiar with the RBI’s thinking. Policymakers are of the opinion that India’s economic fundamentals remain strong and the banking system is sound, but that strength is not being reflected in the exchange rate, they said. The top priority for the central bank now is to stop the depreciation of the currency, and the RBI is ready to do whatever it takes to achieve that, one of the people said.

Aberdeen Investments and MetLife Investment Management are among those that see the possibility of the rupee weakening to 100 per dollar. DBS Group Holdings has revised its forecast range to 95-100 from 90-95. The consensus estimate compiled by Bloomberg shows 94.75 by year-end, while the one-year dollar-rupee forward breached 100 for the first time on Wednesday.

Inflation pressure

Raising borrowing costs would help spur foreign bond inflows by widening the interest rate differential between the US and India, which has narrowed to over a decade low.

Investors have dumped Indian assets this year, with foreign fund outflows from stocks so far in 2026 surpassing last year’s record $19 billion.

The RBI’s six-member monetary policy committee is scheduled to meet 3-5 June. The committee has kept its benchmark rate unchanged at 5.25% this year, although most economists predict a hike in coming months as inflation accelerates.

Consumer-price growth remains below the RBI’s 4% target, although pressure is building on retailers to pass on costs. Wholesale goods inflation more than doubled to 8.3% in April from the previous month, latest figures show.

A rate hike would also curb demand for imports of consumer electronic goods and gold, which the government has been trying to do.

Some economists said the RBI would likely opt for mobilising dollar deposits from Indians living overseas rather than increasing rates just yet.