After the Dollar-Rupee rate gained nearly 7% this year, can higher Indian interest rates contain the INR’s losses against the USD?
Crédit Agricole expects India to raise interest rates on Wednesday, but sees the move helping to stabilise the Rupee rather than deliver a substantial recovery before year-end.
Its 30 September report forecasts a 25-basis-point RBI increase to 5.50% on 7 October, while retaining USD/INR at 96 for the second half of 2026.
The US Dollar to Indian Rupee exchange rate was quoted near 96.16 late on Friday, 2 October, down 0.07% on the day but up 0.86% during September.
That leaves the bank’s currency forecast close to the prevailing rate after a 6.87% rise in USD/INR since the start of the year.
Inflation is driving the rate call
Crédit Agricole’s David Forrester identifies three pressures: expensive oil, the inflationary impact of Rupee depreciation and disappointing monsoon rainfall.
At the report’s publication, oil exceeded $100 a barrel, compared with the RBI’s assumed $80-85 range, while weaker rainfall threatened further food-price increases.
Official August figures already showed annual consumer inflation rising to 4.82% from July’s 4.45%, with food inflation at 5.95%.
Forrester distinguishes the purpose of a rate increase from the RBI’s intervention in currency markets.
“Importantly, we do not think RBI is raising rates to support the INR, but rather to offset the weak currency’s upward pressure on inflation.”
A weaker Rupee increases the local-currency cost of imports, compounding the effect of higher oil prices.
The bank also argues that domestic activity gives policymakers room to act.
“Firm service exports and government infrastructure projects are supporting the economy, suggesting the economy can bear higher rates.”
A modest adjustment, with a neutral stance
The October call gives a specific date to the fourth-quarter increase Crédit Agricole anticipated in September.
“We do not think this will be the start of a tightening cycle and expect the central bank to maintain a neutral bias. We expect the MPC to fine tune its monetary policy rate moving the policy rate towards the upper end of its neutral range, giving it the flexibility to move policy into restrictive territory if needed.”
That does not mean the bank expects only one increase: its forecasts put the repo rate at 5.50% in December and 5.75% by March 2027.
The bank sees more restrictive policy as a risk if energy prices stay elevated and El Nino persists into the 2027 monsoon season.
For the Rupee, higher rates, capital inflows and the RBI’s capacity to intervene should counter the pressure from oil and weak monsoons, according to the bank.
“We retain our H226 forecast for USD/INR at 96.00.”
The size of Wednesday’s decision will therefore be only part of the currency story.
“The impact on the INR of a hike will depend on the vote count as well as the bias announced in the statement and RBI’s new forecasts.”
Our currency coverage draws on live market data, official economic releases and published bank research.
