Rupee Dives to Record Low, RBI Takes Rate Hike to Agenda Early

The rupee fell to a historic low of nearly 97 per US dollar this week, and the response options of the Reserve Bank of India (RBI) have been put on the table - including early interest rate hikes, introduction of overseas financing, and expansion of currency swap scales.

According to Bloomberg, senior officials such as RBI Governor Sanjay Malhotra have recently held intense internal meetings discussing exchange rate stabilization plans. Informed sources have revealed that there is an increasingly clear consensus within the policy levels: the depreciation rate of the rupee has been faster than expected, and India's strong economic fundamentals have not been reflected in the currency fluctuations.

A knowledgeable person stated bluntly: "The central bank's top priority now is to stop the depreciation. The Reserve Bank of India is ready to do anything to achieve this goal."

After the news spread, the market reaction was significant: the rupee rose 0.5% to 96.38 on Thursday, and the 10-year government bond yield fell by 3 basis points to 7.05%.

The next regular meeting of the Monetary Policy Committee of the RBI is scheduled for June 3 to 5, and the benchmark interest rate is currently maintained at 5.25%. Insiders say there is a possibility of taking action before then - the RBI made a similar extraordinary policy adjustment in May 2022. In addition, Malhotra had previously expressed a tendency to intervene in a way that affects inflation expectations rather than directly tightening monetary policy, making this shift in policy direction particularly striking.

Besides interest rate hikes, the RBI is reported to be considering two supplementary measures: one is launching a deposit scheme for non-resident Indians to attract foreign exchange inflow through domestic banks, with knowledgeable insiders estimating that this round could raise up to US$50 billion, higher than the approximately US$30 billion scale during the 2013 "taper tantrum" period; the other is issuing sovereign dollar bonds, but the final decision on this plan needs to be made at the government level.

Before introducing larger-scale policies, the RBI announced a US$500 million currency swap auction on Wednesday to inject liquidity into the market, with insiders revealing similar operations may continue in the future.

The root of this round of pressure lies in the persistent and large-scale outflow of foreign capital. Since the beginning of the year, foreign funds have net outflowed from the Indian stock market in amounts exceeding last year's record of US$19 billion. At the same time, the Indian rupee has fallen by about 7% so far this year, making it one of the worst-performing currencies in Asia. The interest rate difference between India and the US has narrowed to a level not seen in over a decade, further weakening the attractiveness of Indian bonds to foreign capital - if interest rate hikes are implemented, it will help to widen the interest rate difference.

For investors, the most critical time point at the moment is the monetary policy meeting on June 5th and whether the RBI will take preemptive action. Whether the rupee trend can stabilize will directly affect foreign capital's willingness to allocate Indian assets, and it will also determine the ultimate intensity of this policy game.