The Reserve Bank of India (RBI) is unlikely to raise interest rates aggressively just to defend the falling rupee, reported news agency Reuters, citing sources familiar with the central bank’s thinking.
Instead, the RBI is expected to focus more on inflation and broader economic stability even as the rupee continues to hit record lows against the US dollar amid the ongoing global oil shock.
The report comes at a time when markets have increasingly started betting that the RBI may be forced to raise repo rates because of the sharp fall in the rupee and rising crude oil prices linked to the Iran conflict.
However, the RBI does not believe rate hikes are the best tool to stabilise the currency.
According to the report, the RBI believes inflation, not the rupee itself — should remain the main guide for interest rate decisions.
While the rupee has weakened sharply in recent months, inflation still remains within the RBI’s tolerance range of 2-6%.
Consumer price inflation stood at 3.48% in April, although officials now expect it to move closer to 5% because of rising crude oil prices and imported inflation pressures.
The RBI’s inflation target is 4%.
Sources quoted in the Reuters report said policymakers fear that raising interest rates too sharply may hurt economic growth without significantly helping the rupee.
“There doesn’t seem to be an urgent need for the central bank to jump into rate hikes,” one source told Reuters.
The report added that the RBI has several other options available to support the currency, including:
dollar deposit schemes for non-resident Indians (NRIs),tax changes for debt investors,dollar sales,and liquidity management measures.
Financial markets have increasingly started pricing in the possibility of RBI rate hikes.
Interest rate swap markets are currently expecting at least 40 basis points of hikes over the next three months, and over 100 basis points over the next year.
Some global financial institutions, including Standard Chartered, have also predicted rate hikes because of inflation risks linked to expensive crude oil and the weakening rupee.
But sources quoted by Reuters said smaller rate hikes may not do much to defend the currency.
“A meaningful currency defence would require steep rate increases,” one source said, warning that limited hikes could hurt demand without meaningfully stabilising the rupee.
as the Iran conflict disrupted global energy markets and pushed crude oil prices above $100 per barrel.
The rupee has been on a nine-day losing streak recently, losing around 2.5% of its value and repeatedly hitting record lows against the dollar.
Since the Iran war began in late February, the rupee has weakened nearly 6%. On Wednesday, the
India imports nearly 85-90% of its crude oil requirements, making the economy highly sensitive to rising energy prices.
Higher crude oil prices increase India’s import bill, raise dollar demand and put pressure on both inflation and the current account deficit.
Interestingly, many against the dollar, but how inflation, jobs and growth behave alongside it.
Former IMF Deputy Managing Director and Harvard professor less on the symbolic exchange-rate level itself.
“The relevant number is not the actual value of the exchange rate,” she said in a recent interview. “
Former NITI Aayog Vice Chairman Arvind Panagariya has also argued against obsessing over the Rs 100 mark.
“100 is just a number, like 99 and 101,” Panagariya wrote in a recent post on X.
According to him, allowing the rupee to weaken gradually during a major oil shock may actually be more sustainable than aggressively defending a symbolic level by burning foreign exchange reserves.
Economists say rupee depreciation during a global shock is not automatically negative.
A weaker rupee can make exports more competitive, reduce imports over time, and help conserve foreign exchange reserves.
“Rupee depreciation is partly a problem and partly a solution to the problem,” said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited.
“Rupee depreciation boosts exports and at the same reduces foreign exchange expenditure,” he added.
This becomes especially important during energy crises.
With tensions around the Strait of Hormuz affecting oil supplies and global shipping routes, India’s oil import bill has already started rising sharply.
Many economists believe allowing the rupee to weaken gradually can help absorb part of this external shock naturally.
At the same time, economists warn there is a big difference between controlled depreciation and a disorderly fall in the currency.
A rapidly falling rupee can quickly increase imported inflation because products such as crude oil, fertilisers, edible oils, electronics and industrial inputs become more expensive.
Those higher costs eventually affect fuel prices, transport costs, grocery bills, manufacturing, and household expenses.
“Expensive dollar leads to imported inflation. That’s why the RBI is trying to stabilise the rupee through intervention,” Vijayakumar said.
Kaveri More, Commodity Analyst at Choice Broking, said the RBI’s main goal is to prevent panic and excessive volatility.
“The Indian government and RBI remain highly sensitive to sharp rupee depreciation because a weaker currency increases India’s import bill,” she said.
According to her, the RBI has already been using dollar sales, liquidity management, restrictions on banks’ currency positions, and measures to curb speculation.
“The RBI’s primary objective is therefore to prevent disorderly depreciation that could trigger inflation, investor panic, and broader macroeconomic instability,” More added.
The RBI’s Monetary Policy Committee is scheduled to announce its next policy decision on June 5.
According to the Reuters report, RBI Governor Sanjay Malhotra recently discussed with economists whether policy lags could justify a pre-emptive rate hike.
However, most economists currently do not expect a repo rate hike in June.
The Reuters report also said the RBI’s earlier economic growth forecast of 6.9% for the current financial year may be revised lower because of rising oil prices and global uncertainty.
The debate around the rupee has changed sharply in recent months.
Earlier, sharp rupee weakness was often seen mainly as a sign of economic trouble.
But many economists now believe that during a major global energy shock, some currency depreciation may actually help absorb pressure on the economy.
That does not mean a weaker rupee is painless.
If high crude oil prices continue for a long period, inflation could rise further, household costs may increase and growth could slow down.
Still, many economists now argue that using massive foreign exchange reserves or steep rate hikes purely to defend a symbolic level like Rs 100 may not always be the best strategy.
For the RBI, the bigger challenge may therefore be ensuring the rupee’s fall remains gradual and controlled — without allowing panic to spread across markets and the wider economy.