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India's RBI faces tough rate call amid energy shock, weak rupee

Created at 2 Jun · 12:31 AM4 sources↑ Market-relevant4 events
IN SHORT

India's central bank faces a difficult interest rate decision this week due to a Middle East energy shock, a depreciating currency, and a weak monsoon, which risk both hindering growth and increasing inflation. The rupee has fallen to record lows following a spike in crude prices.

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Key Numbers

90%of India's oil needs are imported
5.25%current policy repo rate
80%economists expect repo rate unchanged
11economists forecast a 25 basis-point hike
1economist expected a 50 basis-point increase
125basis points of rate cuts last year
100basis points of tightening priced in over next 12 months
65basis points the one-year OIS rate moved higher since March
37basis points benchmark 10-year yields have risen over the same period

Who's Involved

Reserve Bank of India
Central bank facing a difficult interest rate decision
Rahul Bajoria
Chief India economist at BofA Global Research
Reuters poll
Surveyed 56 economists on RBI policy expectations
Indonesia, Philippines, Sri Lanka
Oil-importing countries that have raised rates

↳ Why This Matters

India's central bank is grappling with a complex monetary policy decision influenced by rising global energy prices due to geopolitical tensions, a weakening rupee, and concerns about a weak monsoon impacting inflation and growth. The country's heavy reliance on oil imports makes it particularly vulnerable to energy price shocks. The Reserve Bank of India must balance the need to support the currency and manage inflation against the risk of stifling economic growth with higher interest rates.

Key facts

  • India's central bank faces a difficult interest rate decision this week.
  • Lingering U.S.-Iran tensions have caused a spike in crude oil prices.
  • India imports nearly 90% of its oil needs, impacting its economy.
  • The Indian rupee has fallen to record lows since late February.
  • Nearly 80% of economists polled expect the RBI to keep the repo rate unchanged at 5.25%.

India's central bank is grappling with a complex monetary policy decision influenced by rising global energy prices due to geopolitical tensions, a weakening rupee, and concerns about a weak monsoon impacting inflation and growth. The country's heavy reliance on oil imports makes it particularly vulnerable to energy price shocks. The Reserve Bank of India must balance the need to support the currency and manage inflation against the risk of stifling economic growth with higher interest rates.

Frequently asked questions

India's central bank faces a tough interest rate call due to a Middle East energy shock, a slumping currency, and a weak monsoon, which risk both crimping growth and stoking inflation.

The resultant spike in crude prices from the Iran conflict has delivered a severe blow to India's economy, which imports nearly 90% of its oil needs, causing the rupee to tumble to record lows.

Nearly 80% of economists polled expect the Reserve Bank of India to keep the repo rate unchanged at 5.25%, while a smaller portion forecast a rate hike.

No, India's central bank does not favour monetary policy action to defend the rupee, according to Reuters.

What Happens Next

01Reserve Bank of India's policy decision on Friday.
02Interest rate swaps pricing in nearly 100 basis points of tightening over the next 12 months.

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Cadence
CME Headlines
  • 10-Year Treasury Note yields rose on Middle East supply risks.
    8 Jul · 8:03 PM
  • 10-Year Treasury Note yields rose on Middle East supply risks.
    8 Jul · 8:03 PM
  • Japanese Yen futures fell near multi-decade lows.
    8 Jul · 7:57 PM

How It Developed

2 Jun · 8:27 AM
RBI faces a tough rate call due to Middle East energy shock, weak rupee, and monsoon, risking growth and inflation.
Reuters via PiQSuite
2 Jun · 4:53 AM
Indian bonds are steady amid U.S.-Iran tensions and upcoming RBI policy, with shallow trading volumes.
Economic Times via PiQSuite
2 Jun · 3:33 AM
The Indian rupee opened weaker at 95.06 per dollar, a 0.1% slip from its previous close.
@FirstSquawk via PiQSuite
2 Jun · 12:01 AM
The Indian rupee closed flat against the dollar on Monday, supported by state-run banks selling dollars.
Economic Times via PiQSuite

Sources

T1
PSB dollar sales help rupee close flat at 95m.piqsuite.com
T1
Indian currency opens weaker at 95.06 per dollar, slipping 0.1% from the previous close of 94.99.@FirstSquawk via PiQSuite
T1
Indian bonds steady as U.S.-Iran tensions linger; RBI policy review due Fridaym.piqsuite.com
T1
Iran war puts RBI in razor-edge policy bind over inflation, growth and rupeem.piqsuite.com

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