Indian Rupee: RBI Minutes Dampen Rate Cut Expectations – DBS Bank

The Reserve Bank of India's (RBI) latest August monetary policy meeting minutes signaled a more cautious tone than the governor's public remarks, notably cooling market bets on near-term rate cuts. DBS Bank analyst Radhika Rao noted that most committee members adopted a neutral-to-cautious stance, while Deputy Governor Poonam Gupta firmly pushed back against rate cut expectations, emphasizing that the inflation outlook remains dependent on monsoon performance, El Niño risks, and geopolitical developments, with potential tightening risks not yet eliminated.

**Inflation Path Determines Policy Space**

Although DBS Bank's baseline expectation remains "moderate rate cuts," this assessment carries strict preconditions. The bank believes a rate cut scenario requires the inflation path for fiscal year 2026 to be not only 50 to 60 basis points lower than the RBI's current projections but also to have substantially fallen below the 2% to 6% target range. At present, the inflation picture remains complex. Following an oil price surge, India's June inflation hit an 18-month high of 4.38%, while core inflation remains moderate but is expected to rise to 4.7% in the fiscal year ending March 2027. HSBC Global Research's report is more hawkish, forecasting inflation to stay above 5% for eight consecutive months starting October, and expecting the central bank to hike rates by 25 basis points each in October and December.

**Rupee Volatility Adds Policy Uncertainty**

The RBI unanimously decided at its recent meeting to hold the policy reverse repo rate at 5.25% and maintain a neutral stance. Governor Sanjay Malhotra stated that greater clarity on the "path and composition" of inflation is needed before any policy action. Meanwhile, rupee exchange rate volatility has added complexity to policymaking. USD/INR previously traded around 95.1025, while as of the latest data, the spot price has risen to 95.70993, with rupee weakness potentially further constraining the central bank's easing space through imported inflation channels. Against a backdrop where the growth outlook has become "hazy" due to monsoon, geopolitical, and global trade policy uncertainties, the RBI is likely to continue cautiously avoiding clear policy guidance in the near term.