Indian Rupee: RBI tightening cycle resumes – Commerzbank

Commerzbank’s Charlie Lay reports that RBI has restarted its tightening cycle, hiking the repo rate 25bp to 5.50% and adopting a calibrated tightening stance. The move is pre-emptive, aimed at containing rising inflation expectations amid resilient growth. While supportive for INR at the margin, Lay expects Oil, US yields, the Dollar and portfolio flows to remain the key near-term drivers.

Pre-emptive hike and hawkish bias

"The RBI unanimously raised the repo rate by 25bp to 5.50%, its first hike in nearly four years, and shifted its stance from neutral to “calibrated tightening” by a 4-2 vote. The hike is primarily pre-emptive. While RBI still sees limited demand-side inflation pressure, it noted signs of rising inflation expectations and broader price pressures amid higher food and energy costs."

"The policy bias has clearly turned more hawkish, although RBI stressed that calibrated tightening does not imply a predetermined sequence of hikes. Instead, RBI will be data-dependent. The next move will be either a hike or a pause."

"What is clear is that rate cuts are off the table in the near term. RBI raised its FY2026-27 CPI forecast to 5.2% from 5.0%, with inflation projected to hit 6.0% in Q4 2026, which will be at the upper end of RBI’s 2-6% target range."

"The policy shift is supportive for INR at the margin, as higher rates and the prospect of further tightening improve India's relative carry and signal RBI's determination to contain inflation. However, USD/INR rose around 0.4% to 96.78 following the decision, as the 25bp hike was largely priced in and the policy guidance was not significantly more aggressive than expected."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)