Rupee Near 95/$: RBI Defence Raises Rate Hike Bets

The rupee RBI rate hike debate is intensifying: the Reserve Bank of India is now using interest rates and liquidity tools, not only dollar sales, to defend the currency, and HSBC and State Bank of India both expect a 50 basis point hike at the December policy review, according to a Reuters analysis dated October 16, 2026.

The rupee has lost about 6% this year, making it one of Asia’s weakest currencies. It recently neared its previous low of 96.96 per dollar before recovering to 94.71, a rebound of about 2% from the lows. The RBI raised policy rates this month for the first time in four years.

How Is the RBI Defending the Rupee?

According to the Reuters analysis, the central bank is draining liquidity through bond sales and tighter reserve requirements for banks and large forex hedging deals. It has also cut foreign exchange position limits for banks and offered dollars directly to government oil firms from its reserves. Since March, it has mobilised about $150 billion through inflow measures, including a subsidised dollar-deposit scheme for the Indian diaspora.

Continued spot dollar sales have drained reserves and pushed the cost of betting against the rupee to a five-year high. Domestic bond yields have risen 45 to 60 basis points since early September. Governor Sanjay Malhotra said monetary policy “could not be entirely separated from financial stability”, a shift from the earlier position that rates would not be used to defend the currency.

What Do Analysts Expect From the December Policy?

The December review could discuss a 50 bp hike if inflation warrants front-loading, Reuters reports. HSBC expects a 50 bp hike, per a report on Wednesday, and SBI has made the same call. The rupee swaps market is pricing in a chance of an outsized hike at the next meeting.

HSBC’s Pranjul Bhandari wrote in an October 14 note: “It feels like a re-run of 2013 measures, but in reverse order.” Invesco’s Norbert Ling said a hike supports policy credibility and reduces the incentive to bet on further rupee weakness, while Amundi’s Alessia Berardi warned that targeting the currency with rates would tighten conditions for an economy already absorbing an energy shock.

Market and Trade Reaction

Overseas investors have net sold nearly $33 billion of Indian equities in 2026 and have been net sellers of debt since August. Because nearly 60% of loans are linked to external benchmarks, rate changes pass through to borrowers quickly. India’s economy grew 7.8% in April–June but is expected to slow in the second half of the fiscal year, and inflation is seen re-entering the tolerance band only in early 2027.

What Happens Next?

The next Monetary Policy Committee meeting is scheduled for December 2–4, 2026, with the minutes of the October meeting due on October 21. Watch the rupee against its 96.96 low, the pace of reserve drawdown, bond yields, and foreign portfolio flows.

Frequently Asked Questions

Where is the rupee trading?

Per Reuters on October 16, it recovered to 94.71 per dollar after nearing its previous low of 96.96.

How big a rate hike do analysts expect in December?

HSBC and State Bank of India expect a 50 basis point hike, although that is a forecast, not an RBI decision.

Why is the RBI using rates to defend the rupee?

Dollar sales alone have drained reserves, and Governor Malhotra said monetary policy cannot be entirely separated from financial stability. Higher rates raise the cost of betting against the rupee.