How soon will the Reserve Bank of India raise rates and how high will it have to take them? Those have become urgent questions for bankers in Mumbai after elevated energy-import costs pushed the rupee to a record low Thursday.
India’s challenge is similar to Japan’s, where the yen slid past the 160 mark against the dollar to its weakest level since 2024. Just as the Bank of Japan under Governor Kazuo Ueda is reluctant to commit to a rate increase, his RBI counterpart Sanjay Malhotra, too, has signaled a preference to stay on pause. The central bank would step in, he said in an April 18 speech at Princeton University, “through its influence on inflation expectations rather than through blunt demand compression,” a euph ..
Still, Malhotra’s cheap-money era is likely drawing to a close — thanks to the pressure from the foreign-exchange market. The war in Iran started two months ago, and it has hammered the Thai baht, the Philippine peso, and the Indonesian rupiah, too. Their central banks are also hesitant to raise their benchmark rates, with the notable exception of the Philippines. But the Indian currency has been Asia’s worst performing over the past two years, and staying pat for too long may backfire.
A weaker rupee in 2025 may have been a deliberate strategy to insulate exporters from punitive US tariffs. The RBI slashed its key borrowing cost by 125 basis points after Malhotra took on the governor’s job in December 2024. It also pumped nearly 20 trillion rupees ($210 billion) into banks, nearly double the amount of liquidity support during the pandemic.
Yet the funds simply leaked out of the country’s banking system as global money managers dumped local assets and took dollars home. As a result, funding for banks remains tight. And now that the choked arteries of Middle Eastern oil and gas flows threaten to drag the rupee toward the psychological barrier of 100 to the dollar (it closed at 94.92 Thursday, after breaching 95 in intraday trading), there’s a risk that the capital exodus will accelerate. Of the $26 billion pulled out of the equity market by overseas investors over the past year, $20 billion of outflows have taken place since January.