Indian Rupee: Policy pause offers limited support – Commerzbank

Commerzbank’s Charlie Lay reports that the Reserve Bank of India kept the repo rate at 5.25% for a fourth meeting, maintaining a neutral stance. RBI sees recent inflation overshoot as supply-driven and trimmed its FY2026-2027 inflation forecast while lifting growth to 6.7%. USD/INR slipped to 95.10 on lower Oil and strong capital inflows, but INR remains one of Asia’s weakest currencies this year.

Policy hold and FX underperformance

"The Reserve Bank of India (RBI) voted unanimously to leave the policy repo rate unchanged at 5.25%. This was in line with market expectations and marked a fourth consecutive meeting on hold. The Monetary Policy Committee (MPC) maintained its neutral policy stance, emphasizing the need for greater clarity on the inflation outlook before taking further action."

"Although June CPI rose above RBI's 4% target to 4.4% yoy, the central bank views the recent increase as largely supply-driven, with limited pass-through into underlying inflation. Reflecting this assessment, RBI marginally lowered its FY2026-2027 inflation forecast to 5.0% from 5.1% previously. It also raised the growth forecast for FY2026-2027 to 6.7% from 6.6%, citing resilient domestic demand and supportive government policies."

"Overall, the policy statement suggests RBI remains comfortable maintaining a wait-and-see approach. It is effectively preserving policy flexibility amid elevated external uncertainty. Unlike several regional central banks which have hiked rates this year, including South Korea, Indonesia, and the Philippines, RBI continues to view the recent rise in inflation as largely supply-driven and temporary."

"Policymakers have indicated they would respond only if higher food and energy prices lead to more broad-based inflationary pressures. The interest rate markets have also pared back expectations of near-term tightening. The probability of an October rate hike fell to around 58% from over 90% before the meeting."

"In FX, USD/INR fell 0.3% to around 95.10, aided by the recent decline in oil prices. RBI also noted that measures introduced in June to attract foreign capital have already generated more than USD40bn of inflows through FCNR(B) deposits and overseas borrowing facilities. This has helped to cushion pressure on INR."

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