Rupee weakness unlikely to prompt RBI rate hike at June MPC meeting
June 02, 2026
Indian Rupee: Economists expect the RBI to keep rates unchanged and rely on intervention and regulatory measures to manage rupee volatility while maintaining focus on inflation
Economists expect the RBI to keep rates unchanged and rely on intervention and regulatory measures to manage rupee volatility while maintaining focus on inflation
Reserve Bank of India (RBI)
Anjali Kumari Mumbai
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The Reserve Bank of India (RBI) is unlikely to use interest rates to defend the rupee, with economists expecting the central bank to remain focused on inflation while relying on intervention and regulatory measures to manage currency volatility.
The six-member Monetary Policy Committee (MPC) will start its three-day deliberations tomorrow to decide on interest rates. The decision will be announced on Friday. The MPC has kept the policy repo rate unchanged at 5.25 per cent in the last two meetings.
The rupee has weakened by 5.66 per cent against the US dollar so far in the current calendar year amid the West Asia conflict that started in late February. The conflict resulted in a rise in crude oil prices that could widen India's current account deficit — a key negative for the Indian unit.
On Tuesday, the rupee depreciated by 0.29 per cent to settle at 95.27 per dollar, against the previous close of 95 per dollar, on the back of dollar demand among importers. The Indian unit has depreciated by over 10 per cent in the last one year.
Economists said the Monetary Policy Committee (MPC) is likely to maintain a clear separation between monetary policy and exchange-rate management under its flexible inflation-targeting framework.
"The RBI is an orthodox inflation-targeting central bank," Nomura said in a report. "An interest-rate defence of the currency could lead to expectations of policy tightening whenever the rupee weakens, which would be a dangerous policy precedent," the report added.
The report said the domestic rate-setting panel is expected to unanimously keep the repo rate unchanged at 5.25 per cent, arguing that rate hikes are an ineffective tool for currency defence and that inflation has not yet become broad-based enough to warrant policy tightening.
Drawing parallels with the 2013 taper tantrum episode, Nomura said higher interest rates had limited success in supporting the rupee, while measures aimed at attracting foreign-currency inflows proved more effective. It expects the RBI to instead deploy non-monetary measures and macroprudential tools to manage balance-of-payments pressures and curb speculation against the currency.
Economists expect the central bank to stay focused on inflation, despite pressure on the rupee.
"The MPC is likely to prioritise the key mandate, inflation, while relying on other instruments to stabilise the currency and bond markets," said Radhika Rao, senior economist and executive director at DBS Bank.
Rao said headline inflation remains close to the midpoint of the RBI's 2-6 per cent target range, while second-round effects from higher fuel prices have yet to emerge.
Economists expect the central bank to adopt a wait-and-watch approach, while revising its inflation forecasts upwards and maintaining rates at current levels.
They said that although the widening interest-rate differential with the United States strengthens the argument for higher rates, currency management does not directly fall within the ambit of monetary policy.
"One logic could be for RBI to defend the currency by raising rates and attracting higher capital flows. However, currency management through rate action does not directly fall under the ambit of monetary policy," Bank of Baroda said in a report.
It expects the RBI to maintain the status quo on rates and allow the rupee to find its own level, while continuing intervention through spot and forward market operations.
Emkay Global said the RBI is likely to reiterate the distinction between monetary policy and foreign-exchange management at the June review.
"Any future rate hike would likely be aimed at curbing domestic demand pressures or anchoring inflation expectations, rather than defending the rupee," the brokerage said, adding that foreign-exchange volatility would continue to be managed through reserves and regulatory measures.
Economists said the central bank is likely to acknowledge rising inflation risks from higher fuel prices, geopolitical uncertainty and the possibility of an El Niño event. Most expect the RBI to raise its inflation projections for FY27 while retaining a cautious stance on rates.
While the case for policy tightening has strengthened since the April review, economists said any future rate action would likely be driven by broad-based inflation pressures and a rise in inflation expectations rather than weakness in the rupee.
Markets will also watch for any measures aimed at attracting dollar inflows, including steps related to external commercial borrowings, NRI deposits or other capital-flow channels, economists said.
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First Published: Jun 02 2026 | 6:13 PM IST
Reserve Bank of India (RBI)
Anjali Kumari Mumbai
Listen to This Article
The Reserve Bank of India (RBI) is unlikely to use interest rates to defend the rupee, with economists expecting the central bank to remain focused on inflation while relying on intervention and regulatory measures to manage currency volatility.
The six-member Monetary Policy Committee (MPC) will start its three-day deliberations tomorrow to decide on interest rates. The decision will be announced on Friday. The MPC has kept the policy repo rate unchanged at 5.25 per cent in the last two meetings.
The rupee has weakened by 5.66 per cent against the US dollar so far in the current calendar year amid the West Asia conflict that started in late February. The conflict resulted in a rise in crude oil prices that could widen India's current account deficit — a key negative for the Indian unit.
On Tuesday, the rupee depreciated by 0.29 per cent to settle at 95.27 per dollar, against the previous close of 95 per dollar, on the back of dollar demand among importers. The Indian unit has depreciated by over 10 per cent in the last one year.
Economists said the Monetary Policy Committee (MPC) is likely to maintain a clear separation between monetary policy and exchange-rate management under its flexible inflation-targeting framework.
"The RBI is an orthodox inflation-targeting central bank," Nomura said in a report. "An interest-rate defence of the currency could lead to expectations of policy tightening whenever the rupee weakens, which would be a dangerous policy precedent," the report added.
The report said the domestic rate-setting panel is expected to unanimously keep the repo rate unchanged at 5.25 per cent, arguing that rate hikes are an ineffective tool for currency defence and that inflation has not yet become broad-based enough to warrant policy tightening.
Drawing parallels with the 2013 taper tantrum episode, Nomura said higher interest rates had limited success in supporting the rupee, while measures aimed at attracting foreign-currency inflows proved more effective. It expects the RBI to instead deploy non-monetary measures and macroprudential tools to manage balance-of-payments pressures and curb speculation against the currency.
Economists expect the central bank to stay focused on inflation, despite pressure on the rupee.
"The MPC is likely to prioritise the key mandate, inflation, while relying on other instruments to stabilise the currency and bond markets," said Radhika Rao, senior economist and executive director at DBS Bank.
Rao said headline inflation remains close to the midpoint of the RBI's 2-6 per cent target range, while second-round effects from higher fuel prices have yet to emerge.
Economists expect the central bank to adopt a wait-and-watch approach, while revising its inflation forecasts upwards and maintaining rates at current levels.
They said that although the widening interest-rate differential with the United States strengthens the argument for higher rates, currency management does not directly fall within the ambit of monetary policy.
"One logic could be for RBI to defend the currency by raising rates and attracting higher capital flows. However, currency management through rate action does not directly fall under the ambit of monetary policy," Bank of Baroda said in a report.
It expects the RBI to maintain the status quo on rates and allow the rupee to find its own level, while continuing intervention through spot and forward market operations.
Emkay Global said the RBI is likely to reiterate the distinction between monetary policy and foreign-exchange management at the June review.
"Any future rate hike would likely be aimed at curbing domestic demand pressures or anchoring inflation expectations, rather than defending the rupee," the brokerage said, adding that foreign-exchange volatility would continue to be managed through reserves and regulatory measures.
Economists said the central bank is likely to acknowledge rising inflation risks from higher fuel prices, geopolitical uncertainty and the possibility of an El Niño event. Most expect the RBI to raise its inflation projections for FY27 while retaining a cautious stance on rates.
While the case for policy tightening has strengthened since the April review, economists said any future rate action would likely be driven by broad-based inflation pressures and a rise in inflation expectations rather than weakness in the rupee.
Markets will also watch for any measures aimed at attracting dollar inflows, including steps related to external commercial borrowings, NRI deposits or other capital-flow channels, economists said.
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First Published: Jun 02 2026 | 6:13 PM IST