Weak Rupee Won't Stand in the Way of More RBI Interest Rate Cuts

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The Reserve Bank of India (RBI) has made it clear that a depreciating rupee will not deter its plans for further interest rate cuts.

Despite concerns over currency weakness, the central bank has kicked off a measured easing cycle with a 25 basis point (bps) cut to the policy repo rate, bringing it down to 6.25%.

This marks the first rate reduction since early 2023 and sets the stage for additional cuts in the coming months.

Image courtesy of UOB.

Governor Sanjay Malhotra reaffirmed that the RBI's approach to foreign exchange intervention is aimed at reducing excessive volatility rather than defending any specific exchange rate level.

This signals that monetary policy decisions will be driven primarily by domestic inflation and growth considerations rather than short-term rupee fluctuations.

In the past weeks, the INR has experienced significant depreciation.

On February 5, 2025, the rupee weakened to a record low, closing at 87.4650 against the U.S. dollar, marking a 0.4% decline for the day and over a 2% depreciation for the year.

Similarly, the rupee has depreciated against the British Pound (GBP), with the GBP/INR exchange rate standing at approximately 108.05 as of January 26, 2025.

Despite these developments, the RBI's intervention in the foreign exchange market remains focused on smoothing excessive volatility rather than defending a specific exchange rate level.

This approach indicates that the central bank prioritises domestic economic conditions over short-term currency fluctuations.

Above: GBPINR and USDINR.

The move was widely anticipated as 36 out of 44 analysts surveyed by Bloomberg predicted a 25bps cut to the repo rate.

While the RBI has commenced its easing cycle, the decision was measured, maintaining a neutral monetary policy stance instead of shifting to an accommodative one.

The RBI's updated forecasts project consumer price inflation (CPI) to moderate to 4.2% in FY26, down from an estimated 4.8% in FY25.

This outlook is supported by stable agricultural output and softening food prices. Additionally, the central bank remains cautiously optimistic about India's growth trajectory, projecting FY26 GDP growth at 6.7%, driven by strong agricultural activity and recovering manufacturing output.

Looking ahead, market analysts anticipate that the RBI will implement another 25 bps cut at its next Monetary Policy Committee meeting in April, bringing the repo rate down to 6.00%. The current easing cycle is expected to total 75 bps, with the terminal rate projected at 5.75% by mid-2025.

"We expect RBI to deliver a second 25bps rate cut in the next Apr MPC meeting in a relatively shallow easing cycle this round (total of 75bps cut), taking the terminal rate to 5.75% by end-Jun 2025," says Jester Koh,
Associate Economist at UOB.

"Should food and overall inflation indeed continue to soften meaningfully in the upcoming CPI readings, a change from neutral to accommodative stance in the Apr MPC meeting is likely on the table," he adds.