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Informist, Wednesday, Jun. 3, 2026

 

By Pratiksha

 

NEW DELHI – As the Indian rupee deals with its worst crisis in over a decade, market participants are counting on the Reserve Bank of India to come up with structural measures to support the Indian currency at its Monetary Policy Committee decision on Friday, with some even expecting a rate hike. 

 

Things have only gone from bad to worse for the rupee, as it has depreciated over 3% against the dollar, inching closer to the psychologically-crucial 100-per-dollar level, since the last monetary policy decision on Apr. 8. The rupee has fallen over 6% against the dollar since the start of 2026, after a 5?cline last year, owing to pressure from high oil prices and sustained foreign investor outflows.

 

Brent crude oil prices have jumped almost 50% since the war in West Asia broke out, and continue to hover near the key $100 per barrel level as prospects of a peace deal between the US and Iran remain uncertain. The rupee is expected to continue depreciating as India is the world's third-largest oil importer, market participants said. 

 

Given the sustained nature of the rupee's depreciation, market participants expect RBI Governor Sanjay Malhotra to pull a rabbit out of the hat. While the central bank's crackdown on speculation through unexpected curbs in March on banks' net open positions in the non-deliverable forwards segment did not prove very effective, calls for unconventional measures to support the Indian currency have only grown louder. 

 

Among the many special measures, the most anticipated is a foreign currency non-resident deposit window by the central bank to attract inflows, a tool last used in 2013 under then RBI Governor Raghuram Rajan. The scheme, under which the RBI had swapped dollars raised by banks via FCNR deposits at concessional rates, successfully mobilised about $26 billion, helping stem the fall of the rupee, which was then reeling under the 'Taper Tantrums'.

 

Policymakers could also come up with an interest subvention scheme for external commercial borrowings, the removal of withholding tax on government bonds, and even a formal foreign exchange swap window for public sector oil marketing companies, market participants said. Nomura expects the RBI to announce non-monetary measures such as lower outward remittance limits, tighter overseas direct investment controls, and shortening exporter repatriation timelines.

 

State Bank of India Group Chief Economic Advisor Soumya Kanti Ghosh said in a note that there is a need for a comprehensive balance of payments package to support the rupee. "The comprehensive BoP package can comprise of capital controls, liquidity modulation and nudging," he said. 

 

Economists expect the balance of payments to be in negative territory in both 2025-26 (Apr-Mar) and FY27. In FY25, there was depletion of $5 billion in foreign exchange reserves on a balance of payments basis. In Apr-Dec, foreign exchange reserves were depleted by $30.8 billion on a balance of payments basis. 

 

The expectation of special measures has only been cemented after Malhotra last month said the RBI would do "whatever is required" to ensure orderly movement in the rupee and curb undue speculation. Moreover, market participants pointed out that the central bank has been intervening aggressively through dollar sales in the spot market in run-up to the policy decision. As of Tuesday, the Indian unit recovered almost 1.7% from its record low of 96.9600 a dollar, hit on May 20, primarily due to the central bank's support.

 

"RBI has been intervening heavily, on an average $2 billion every day, for the last two weeks. It is peculiar," a senior treasury official at a private sector bank said. "Market is obviously taking this as a signal that RBI will continue to support rupee no matter what and since policy is just around the corner, more measures will come."

 

A small section of the market also expects the RBI's rate-setting panel to hike the repo rate to support the Indian currency. "While the MPC has reiterated that its repo rate decisions are driven more by domestic growth and inflation dynamics than by the need to defend the currency, the sharper-than-expected pace of INR depreciation raises the risk of second-order effects on CPI and, in our view, strengthens the case for a hike," Standard Chartered Bank said in a note.  

 

However, most participants said that exchange rate does not fall under the ambit of monetary policy and status quo on rates makes more sense as the impact on growth due to the war in West Asia is still difficult to ascertain. Nineteen of the 24 economists and market participants polled by Informist expect the Monetary Policy Committee to hold the repo rate at 5.25% at the end of its three-day meeting Friday.

 

Market participants, however, flagged that measures to attract inflows are likely to provide the Indian currency a more immediate and stronger boost than a rate hike. "Even as CAD (current account deficit) is manageable, capital inflows have been muted for the last two years with this year also likely to see a BoP deficit (third year). This is putting additional pressure on the currency," ICICI Bank said in a note.

 

"Hence, the focus should be to revive capital inflows rather than raising policy rates when core inflation is stable. While eventual policy rate should go up by 50-75 bps to align inflation with target, the current policy could incentivise inflows via hedge support for deposits and bonds," it added. 

 

Most currency dealers said that in case the central bank does not announce any rupee-supportive measures on Friday, the Indian unit may fall sharply, around 30-40 paise. And in case the central bank does so, the Indian unit may rise sharply, depending on the effectiveness of the measure.

 

RBL Bank Treasury Head Anshul Chandak said no measures from the RBI for the rupee would surely be a disappointment and the Indian currency might react adversely in that case. "We may see a 30-35 paise fall in rupee in that case," he said. 

 

Thus, action or no action, the June policy meeting could be a turning point for the Indian currency.  End

 

US$1 = INR 95.71

 

Edited by Avishek Dutta

 

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