India’s rupee retreated even after the central bank hiked interest rates for the first time in four years , as the lack of more aggressive steps to tighten liquidity and support the currency left traders disappointed.
The rupee slid as much as 0.4% to 96.85 per dollar to be the worst performer in Asia on Wednesday, inching closer to an all-time low of 96.9650 reached in May.
The Reserve Bank of India raised the benchmark repurchase rate by 25 basis points to 5.50%. It also shifted its policy stance to calibrated tightening from neutral, implying a “milder form” of a hiking cycle, Governor Sanjay Malhotra said. That wasn’t seen as hawkish enough to offset the pressure on the currency from elevated oil prices and rising US interest rates, according to market watchers.
“The market has considered the word ‘calibrated’ to mean that the RBI may not hike much,” said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors in Mumbai. “That is one of the reasons why rupee has fallen apart from usual dollar buying by foreign portfolio investors and some oil companies.”
Some traders had also positioned for strong liquidity-withdrawal measures from the RBI, Bhansali said, adding that those bets were being unwound after the rate decision.
The RBI has been aggressively reducing liquidity after its recent program to attract foreign-currency deposits from overseas Indians brought in larger-than-expected flows, flooding the banking system with cash and threatening to fuel inflation. Surplus liquidity rose to an all-time high of 11 trillion rupees ($113.7 billion) in September. It was at 4.8 trillion rupees as of Oct. 6, according to a Bloomberg Economics index.
| What Bloomberg Strategists Say: |
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“The rupee needs more than just a rate hike from India’s central bank to find a steady footing. The RBI decision to raise interest rates for the first time in almost four years hasn’t come a day too soon for what has been Asia’s worst-performing currency this year. But with forex reserves tumbling at a record pace last week, the rupee needs all the central bank help it can get. That’s especially the case now the nation’s efforts to raise funds from overseas Indians are already done and dusted — meaning there is no scope for further massive inflows.” — Ven Ram, cross-asset strategist. For more, click here. |
Malhotra said at a post-policy press conference in Mumbai that he doesn’t expect liquidity to remain in such high surplus mode “for a very long period of time.”
‘Correct Value’
A broadly stronger dollar and higher oil prices also weighed on the rupee on Wednesday. The RBI sold dollars in the currency market to lend support, according to traders familiar with the transactions, who asked not to be identified as they are not authorized to speak on the matter publicly.
“We will ensure the rupee stabilizes, finds its correct value,” Malhotra said in response to a question on the rupee’s decline on Wednesday. He also said the currency is probably undervalued by a number of estimates.
Down about 7% so far in 2026, the rupee remains Asia’s worst-performing currency as this year’s surge in energy prices following the Middle East war has added to pressure on India’s import bill and current account. The nation imports almost 90% of its crude and about half its natural gas.
“Investors were looking for more aggressive liquidity tightening or direct foreign-exchange intervention rather than just a rate hike” that was already priced in, said Kunal Sodhani, head of treasury at Shinhan Bank India.
Read more: RBI Signals Further Rate Hikes as Price Pressures Intensify