Indian Rupee: Outlook Points Higher After Hawkish RBI - MUFG

MUFG analyst Michael Wan notes that following the more hawkish signals in the Reserve Bank of India's August Monetary Policy Committee meeting minutes, the institution expects the RBI has ended its current easing cycle. It further forecasts that the central bank will begin raising rates from December, with a cumulative increase of 50 basis points. The core logic behind this policy pivot lies in the strengthening fundamentals supporting higher rupee interest rates.

**Policy Shift Drives Repricing of Rate Expectations**

Wan believes that the RBI's previous foreign exchange intervention measures, aimed at attracting dollar inflows, significantly lowered rupee interest rates by increasing liquidity, but had limited direct impact on the USD/INR exchange rate. As inflation risks and external balance pressures evolve, the central bank's stance has adjusted. According to a previous report by Bank of America, the RBI faces a dilemma between supporting growth and defending the rupee, with its base case scenario having been a "hawkish hold" in June and an initial rate hike potentially in the second half of 2026. MUFG's latest forecast is clearly brought forward from that timeline, indicating a stronger judgment on the urgency of policy tightening.

**Scarce Capital Inflows Pose Potential Challenge**

Despite the hawkish policy shift, the Indian rupee's outlook is not without risks. MUFG's analysis also warns that India faces the challenge of rising money market rates coexisting with scarce capital inflows. If global risk appetite contracts or domestic growth momentum falls short of expectations, weakness in the capital account could partially offset the boost to the rupee from rate hike expectations. The USD/INR pair is currently trading near 95.74059, with the market closely monitoring inflation data and central bank officials' speeches in the coming months to verify the specific timing of the rate hike cycle's commencement.