What a Slipping Rupee Means for Inflation, Rates and RBI MPC's Next Move – Explained

As the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is all set to announce its stance on December 5, markets are on the edge. The GDP growth rate is accelerating, inflation is cooling down, and yet the rupee has slipped past the psychological 90-per-dollar mark.

This policy meeting has come at a crucial time, when the country is facing a rare divergence between macro strength and currency weakness. Currently, JM Financial said that the central bank has a tough task at hand focusing on its dual mandate of supporting growth while maintaining price stability.

“Markets are divided on the RBI’s monetary policy expectation in December, specifically after the robust GDP print that followed the series low inflation. In addition to being forward looking, the RBI’s policy decision should also ensure an effective transmission in yields,” it said.

The RBI has begun its three-day monetary policy committee meeting on December 3, and the decision will be announced at 10 am on December 5 in a press briefing. During these days, the central bank assess the existing policies, and decide whether the current economic environment support a rate cut or not.

So far this year, the RBI MP has lowered the benchmark rate by 100 basis points, i.e., from 6.5% to 5.5%. However, it has then kept the rate cuts on hold in August. Going forward, the markets do not expect a rate cut in December meeting. But they are bracing for the regulator’s intervention in the current scenario.

Growth Boost, Rupee Risk

The market has swung from optimism to caution in the run-up to the policy meeting. A near-zero inflation reading in early November ignited hopes of monetary easing, but those expectations were quickly reined in after GDP surged 8.2% in the second quarter of FY26.

While a rate cut at this juncture will add the “soft growth” patch anticipated in H2 FY26, the brokerage predicted that it will risk further depreciation in rupee. If the rate cut is not accompanied by a “dovish note”, bond yields will harden further.

“The regulator can take the middle path by maintaining status quo, and guide for policy support in the upcoming months. Concerns around the hardening yields or steepening yield curve can be addressed through Open Market Operations (OMOs),” JM Financial said in its recent report.

On the liquidity front, the RBI’s liquidity adjustment facility (LAF) shows a surplus of around 1% of Net Demand and Time Liabilities (NDTL), and money market call rates are comfortably trading within the policy rate corridor.

“…the anticipated tax outflows and Fx interventions will warrant liquidity infusion by the RBI. We believe that the markets lack direction and the need of the hour will be effective communication by the regulator. Hence, regardless of whether a rate cut is delivered or a status quo is maintained, the tone of the policy will be the key monitorable,” it added.

Global Moves, Local Pain

The rupee fell below 90 with drop of 0.17rs at 90.09 with lows tested of 90.28, largely driven by the absence of clarity on the India-US trade deal, coupled with record-high bullion and metal prices that have worsened the import bill, according to Jateen Trivedi, VP Research Analyst, Commodity and Currency, LKP Securities.

“In addition, higher US tariffs and limited RBI intervention have added to the pressure. With the RBI policy due Friday, markets will look for cues on whether the fall will stabilise; technically, the rupee remains oversold and needs to reclaim 89.80 to recover meaningfully,” said Trivedi.

SBI's Economic Research Department, in its latest report, also said that lingering uncertainty over the Indo-US trade deal is keeping sentiments fragile. However, it expects trade deal likely to be completed before March 2026. The bouts of uncertainty, fuelled by hiccups in trade talks, could exert pressure on the rupee with frequent pull-backs.

Since April 2, 2025, when the US announced sweeping tariff hikes across economies, the Indian rupee has depreciated by 5.5% against the greenback, notwithstanding sporadic phases of appreciation owing to optimism over the US-India trade deal, it said, adding, the rupee is the most depreciated currency, but it is not the most volatile.

At present, the ability of market participants to supply greenbacks is quite limited, leaving the Mint Street as the last resort and ultimate supplier of US dollar to the market, but the RBI has likely chosen a restrained approach, avoiding aggressive interventions as part of its policy to not protect any level, it said.

Recovery Begins, All Eyes on RBI

The Indian rupee recovered after crossing the 90 per dollar mark on Thursday, as dollar sales from multiple foreign banks, likely on account of inflows, helped the currency snap a six-session losing streak. The rupee fell to 90.42 early in the session before reversing course to end up 0.2% at 89.97.

Forex traders believe that the rupee recovered slightly ahead of the RBI MP. “I think the rupee strengthened today ahead of the MPC. RBI ideally should wait for more incoming data before a cut. With such sharp depreciation in rupee seen lately, its likely the MPC will go for a policy pause,” said Kartik Sarma, a forex trader at RBL Bank.

Trivedi also stated that the rupee traded positive with gains of 0.28 paise as markets await the RBI policy on Friday, especially after the currency hit all-time lows this week. He said participants remain cautious with the rupee in focus ahead of the policy outcome.

“The currency will also track the US Core PCE Price Index due Friday, which could influence dollar movement. Rupee range is seen between 89.80–90.25, with a breakout potentially taking it toward 89.25 on the upside or 90.75 on further weakness,” he added.

The impact of December’s policy will depend heavily on how the RBI communicates its priorities. While the rupee has seen a steep correction, the brokerage pointed out that the MPC is not designed to target currency levels, so the decision is unlikely to hinge on the exchange rate. “The policy tone will be the key monitorable,” it said, noting that clarity on liquidity and yields could help calm markets.

Hence, a change in policy stance from “neutral” to “accommodative”, supported by OMOs, would signal that the RBI is prepared to manage liquidity stresses while keeping bond markets orderly.