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Informist, Friday, May 22, 2026

 

MUMBAI – The Reserve Bank of India is likely to hike interest rates by at least 50 basis points in the current financial year, in the June and August meetings, as the rupee depreciates and capital inflow remains subdued, MUFG Bank said in a report Friday. MUFG expects interest rate defence for the rupee, as it projects the Indian currency to fall to 98-100 per dollar if the war in West Asia continues. 

 

MUFG's report comes a day after Standard Chartered Bank said the RBI's Monetary Policy Committee is seen raising the repo rate by 25 bps each in June and August to 5.75%. "This is in part a measure to shore up INR by raising domestic and relative rates of returns while managing inflation expectations," MUFG said.

 

In risk scenarios, the hikes may even be higher than 50 bps, MUFG said. "...RBI may bring terminal rates up to between 6.25% to 6.75%, with some reversal in rate hikes subsequently in FY2027/28 once RBI sees year-on-year inflation moderating more durably."

 

MUFG expects the rupee to continue its decline against the dollar--the Indian currency is down over 6% in 2025--because of the combination of weak capital inflows, a wider current account deficit with higher oil prices, and potential energy supply disruption from a prolonged conflict as reasons for a weakening rupee.

 

"Risks from a possible weak Southwest Monsoon and a "Super El-Nino", coupled with uncertainty around further increases in US yields also introduce meaningful left tail risks for INR," the report said.

 

The bank expects the RBI and the government to announce more steps to support the rupee. "We think policies including further domestic fuel hikes, tightening of the Liberalised Remittance Scheme, lower caps on India companies' Direct Investment outflows, coupled with issuance of foreign currency bonds to tap Non-Resident Indian funds among others are likely to be announced moving forward," the report said.

 

However, the report said these measures would only have a durable impact on supporting the rupee if the ease of doing business in India improves and "ultimately improve long-term earnings prospects in India."  End

 

US$1 = INR 95.69

 

Reported by Suryash Kumar

Edited by Avishek Dutta

 

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