RBI Explores Aggressive Measures As Rupee Nears 97 Per Dollar; Rate Hike Likely

The Reserve Bank of India is drawing up a range of emergency options to arrest a sharp slide in the rupee, including a potential interest rate hike, expanded currency swaps and fresh dollar-raising initiatives targeting overseas investors, people familiar with the matter told Bloomberg.

Senior officials at the central bank, including Governor Sanjay Malhotra, have held a series of internal meetings to assess the available tools after the rupee touched a fresh lifetime low of 96.95 against the US dollar on Wednesday before closing at 96.86 — itself a record closing low.

The discussions, reflect growing concern within the RBI that the currency is weakening faster than policymakers had anticipated. Officials are said to believe India's economic fundamentals remain sound but that this strength is not being reflected in the exchange rate.

The domestic currency recovered somewhat in early trade on Thursday, gaining 41 paise to 96.45.

What RBI Is Considering

A rate rise is one of the options under active consideration. The monetary policy committee is next scheduled to meet on 3-5 June, though the RBI has moved outside its regular cycle before — most recently in May 2022. The benchmark rate currently stands at 5.25%, and most economists already expect a hike in the coming months as inflation picks up.

Beyond rates, the RBI is also weighing a non-resident Indian deposit scheme to draw in foreign currency — a measure last deployed during the 2013 taper tantrum, when it raised around $30bn. This time, the central bank estimates such a scheme could attract as much as $50bn. A sovereign dollar bond is another option being discussed, though that decision would rest with the government rather than the RBI.

On Wednesday, the central bank announced a $5bn swap auction to inject liquidity and bolster its dollar reserves in the near term, with further such auctions possible, people familiar with the matter said. Foreign fund outflows from Indian equities this year have already surpassed last year's record $19bn, adding urgency to the RBI's deliberations.