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Informist, Thursday, Apr. 2, 2026

 

By Shubham Rana

 

NEW DELHI – The Reserve Bank of India's regulatory steps to stem the rupee's fall raised expectations that the central bank may raise interest rates to defend the Indian currency. But a prolonged war in West Asia may hurt growth in India, limiting space for the RBI's Monetary Policy Committee to increase rates, economists said.

 

The Indian rupee fell over 4?ter the US and Israel attacked Iran on Feb. 28, prompting the central bank to take steps to curb arbitrage and speculative trade in the foreign exchange market. These steps have helped, with the rupee seeing the biggest single day rise in 13 years on Thursday. The rupee is now down just 2% against the dollar since the start of the war, reversing half of the fall.

 

"Following the RBI's move on March 27 to sharply tighten onshore banks' net open FX positions, attention has turned to whether an interest rate defense will be used next to support the INR," HSBC said in a report. Goldman Sachs had expected 50 basis points of rate hikes in 2026 because of the depreciation of the rupee, even before the RBI announced regulatory steps for the foreign exchange market.

 

Swap rates are pricing in a 25-bps repo rate hike to 5.50% next week itself. "The RBI has already signalled some panic on FX and usually that is accompanied by monetary policy tightening," a senior treasury official at a large private-sector bank said. "Not only is that a reason, there is also a broad-based rise in price pressures across industries from the spike in input costs, not just in the energy basket."

 

Economists maintain a rate hike on Wednesday is extremely unlikely. Even if the war continues for a few months, economic activity will suffer more than inflation will rise in India, and this reduces the chances of interest rate hikes, economists said.

 

"These are still early days in the war. The impact on growth hasn't compounded itself yet. If this conflict goes on for two more months, then the impact on growth starts increasing non-linearly," Sakshi Gupta, principal economist at HDFC Bank, said. "Then, the monetary policy response, I believe, would be more to tackle the growth story. And therefore, in that situation, hiking interest rates or turning hawkish will be very detrimental."

 

Prices have started to rise because of the war, with the India Manufacturing Purchasing Managers' Index showing input prices rose at the quickest in over three-and-a-half years. Economists have raised their inflation projections for FY27 to 4.5-5.0% from near 4.0?fore the war.

 

Even if inflation rises above the RBI's 4% target, the central bank may not raise rates and instead use the space provided by the flexible inflation targeting regime, economists said. The government only last week retained the flexible inflation target for RBI at 4% with a tolerance band of 2% on either side of the target till FY31. The RBI can also justify not raising rates since the price shock will mostly be from the supply side, on which monetary policy has little impact, economists said.

 

HSBC estimates that if crude oil averages below $100 per barrel, inflation should remain within 6%. "But sustained oil above USD100/bbl would push inflation beyond 6%, likely triggering rate hikes," HSBC said.

 

Economists at HSBC said policymakers should avoid boosting demand too early. "But this is a delicate balance. Policymakers don't want to overstimulate, but they also can't tighten so much that the growth slowdown deepens," HSBC said. "This is where neutral policy comes in -- one that neither adds to nor subtracts from growth."

 

"Rate change will be the last thing the RBI will do," Gupta of HDFC Bank said. She does not expect the Monetary Policy Committee to change interest rates in the near future. "If the war is prolonged and you see supply, growth, or sector level stress, then the RBI will have to take steps seen during the pandemic, such as credit guarantee schemes and liquidity windows."  End

 

US$1 = INR 93.10

 

Edited by Ashish Shirke

 

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