Key facts
- The RBI is cautiously widening its defense of the rupee to include monetary policy tools.
- The central bank is expected to continue assessing the need to tighten liquidity conditions.
- A potential 50 basis point rate hike is under discussion for the December policy review.
- The rupee has rebounded 2% from its lows against the dollar.
- Domestic bond yields have risen 45 bps to 60 bps since September.
- Overseas investors have been net sellers of Indian equities and debt.
India's central bank is poised to further tighten monetary conditions to defend the rupee, though it is expected to avoid the aggressive measures seen in past currency crises. The Reserve Bank of India (RBI) has already implemented rate hikes, drained liquidity through bond sales, and imposed stricter reserve requirements for banks and large forex hedging transactions.
The rupee, one of Asia's worst performers this year, had threatened to breach a previous low against the dollar but has since strengthened. Analysts and sources familiar with the RBI's thinking suggest a calibrated tightening approach is underway, with a potential 50 basis point rate hike being discussed for the December policy review if inflation conditions necessitate it.
In addition to monetary policy, the RBI has utilized various tools to support the rupee, including offering dollars directly to oil firms from its reserves and increasing domestic bond yields. However, rapid rate tightening carries the risk of hindering economic growth, which is already expected to slow in the latter half of the fiscal year.