Rising pressure on rupee clouds RBI's February rate cut prospects

India's foreign exchange reserves have declined by $50 billion this quarter as of December 13, according to the latest RBI data

With rising pressure on the rupee and growing cost of foreign exchange (FX) interventions, the opportunity for a rate cut by the Reserve Bank of India (RBI) is narrowing, with chances of a cut in February looking uncertain, said analysts.

 

“As for the RBI, a new Monetary Policy Committee (MPC) in 2025 (with the new governor, deputy governor, and three fairly new external members) will be facing substantially different policy challenges along with a diverse macro and global landscape,” said Madhavi Arora, chief economist, Emkay Global Financial Services.

 

“With mounting FX pressure and increasing cost of FX intervention, conventional rate cut window is only going to get tighter. February cut call gets trickier from here on. The spillover of bond/FX volatility via the global financial markets route could also mean the aim of financial stability may even precede inflation management for the RBI ahead,” she added.

 

 

India’s foreign exchange reserves fell by $50 billion in the current quarter (Q3FY25) as of December 13, latest RBI data showed.

 

The US Federal Reserve's latest dot plot revealed a significantly more hawkish stance, with only two rate cuts projected for 2025 — half the number anticipated in September — and just as many additional cuts expected in 2026, against the previous expectation of four rate cuts. The dot plot shows Fed policymakers' estimates for interest rates at the end of the next several years and over the longer run.

 

After the US rate-setting panel’s meeting outcome, the benchmark 10-year US Treasury yield surged by 11 basis points (bps).

 

Analysts said that a rate cut, under the current circumstances, could exacerbate currency pressures by reducing the rupee's attractiveness and further widening the interest rate differential with global markets.

 

“There is not so much with regard to a rate cut in February because of how currency is panning out,” said the treasury head at a private bank.

 

However, a segment believes that there is a need to consider external sector dynamics alongside growth and inflation trends, emphasising that it is too early to draw conclusions with some time remaining before February.

 

“We have to look at the external sector, and we have to look at growth and inflation. I think it is early days, we should just wait. There is still time between now and February,” said Sameer Narang, head of economics research at ICICI Bank.

 

After increasing the repo rate by 250 bps to 6.5 per cent between May 2022 and February 2023, the domestic rate-setting panel has kept the rate unchanged. The MPC had changed the stance to neutral in October from withdrawal of accommodation.

 

In October, the RBI had revised the growth forecast for FY25 lower to 6.6 per cent, from the previous estimate of 7.2 per cent. The central bank also revised the inflation forecast upward to 4.8 per cent, against the earlier estimate of 4.5 per cent. 

Rupee vs Dollar