India Considers Monetary Policy Options Amid Rupee Decline

Reserve Bank of India Considers Measures to Stabilize Rupee

The Reserve Bank of India (RBI) is exploring all available options to stabilize the rupee, including an interest rate hike, increased currency swaps, and raising dollars from investors overseas. According to people familiar with the matter, top officials, including Governor Sanjay Malhotra, have held a series of internal meetings to discuss potential course of actions following the rupee's recent plunge to a fresh low of almost 97 to a dollar this week.

The RBI is considering raising interest rates, one of the options on the table, with the next scheduled monetary policy decision set for June 5. Although the RBI has previously made an out-of-cycle adjustment in May 2022, the central bank is now weighing its options to address the current situation.

In addition to raising interest rates, the RBI is also considering raising dollars overseas through a deposit scheme for non-resident Indians and selling a sovereign dollar bond. The latter would require a decision from the government. These measures mirror some of those taken during the 2013 taper tantrum period, when India provided a deposit scheme for non-residents through local banks to spur foreign currency inflows.

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The RBI estimates that the deposit schemes could draw as much as $50 billion this time around, compared with about $30 billion previously. There is an increasing recognition among policymakers that the rupee is tumbling faster than anticipated, with policymakers acknowledging that India's economic fundamentals remain strong and the banking system is sound, but that strength is not being reflected in the exchange rate.

The RBI's top priority now is to stop the depreciation, and the central bank is ready to do whatever it takes to achieve that. Raising borrowing costs would help spur foreign bond inflows by widening the interest rate differential between the US and India, which has narrowed to over a decade low. Investors have dumped Indian assets this year, with foreign fund outflows from stocks so far in 2026 surpassing last year's record $19 billion.

Comparison of Foreign Fund Outflows

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The RBI's six-member monetary policy committee is scheduled to meet June 3-5, and while the committee has kept its benchmark rate unchanged at 5.25% this year, most economists predict a hike in coming months as inflation accelerates. On Wednesday, the RBI announced a $5 billion swap auction to infuse liquidity in the banking system and also boost the RBI's dollar reserves in the immediate term. There could be more of such swap auctions, according to people familiar with the matter.