Rupee Plunges to Two-Month Low as RBI Steps In, Major Rate Hike Expected Today

The Indian Rupee has hit a two-month low, plummeting to around 96.42 against the US Dollar on Tuesday, marking a significant drop driven by aggressive dollar demand from importers and substantial outflows from foreign investors. In response, the Reserve Bank of India (RBI) swiftly intervened in the interbank foreign exchange market, selling dollars to stem the currency's rapid depreciation and soothe market jitters. All eyes are now on the RBI Monetary Policy Committee, which is poised to announce its latest policy decision today, October 7, with a 25-basis-point hike in the key repo rate widely anticipated. This currency turmoil isn't happening in a vacuum; it's a direct consequence of soaring global crude oil prices, which are hovering near $100-$107 per barrel, significantly inflating India's import bill as the nation relies heavily on oil imports. Adding to the pressure are elevated US Treasury yields, making dollar-denominated assets more appealing to Foreign Institutional Investors, leading to capital flight from Indian markets. India's CPI inflation hit 4.82% in August and is expected to climb higher, intensifying the need for the RBI to act decisively to maintain price stability and prevent imported inflation. With the RBI Monetary Policy Committee decision looming today, market participants are bracing for a 25-basis-point increase in the repo rate, a move largely factored in by investors. However, Kunal Sodhani, Head of Treasury at Shinhan Bank, warns that while a rate hike is positive, it might not be enough on its own to reverse the rupee's downward trend. He stresses that a clear hawkish stance from the central bank, combined with continued dollar selling and astute liquidity management, will be crucial to truly stabilize the rupee and anchor inflationary expectations in the coming weeks.