The Indian rupee closed at 94.92 to the dollar on May 1, briefly breaching 95 intraday, a record low, as elevated energy import costs and relentless foreign selling pushed RBI Governor Sanjay Malhotra’s 16-month cheap-money experiment to its breaking point. Rate derivative markets are now betting that a central bank, which cut 125 basis points since December 2024, may be forced into reverse.
Malhotra Signalled a Hold. The Market Has Other Ideas
On April 18, speaking at Princeton University, Malhotra made his preference clear: the RBI would address currency stress “through its influence on inflation expectations rather than through blunt demand compression,” central bank language for no hikes. The repo rate currently sits at 5.25%, down from 6.50% when he took the job, per RBI data. The central bank also pumped nearly ₹20 trillion ($210 billion) into banks over that period, per RBI balance sheet disclosures, almost double pandemic-era liquidity support.
That strategy is being stress-tested in real time. Per NSDL data, foreign portfolio investors sold ₹1.92 lakh crore in Indian equities year-to-date through April 30, already exceeding the ₹1.66 lakh crore they offloaded across the entirety of 2025. Interest-rate derivative markets are betting the RBI will be forced to roll back its pro-growth stance to defend an exchange rate that has fallen 12% over two years, per Bloomberg data. Some fund managers say that bet is excessive. Others are not so sure.
The Crude Loop Driving the Selloff
The mechanism isn’t complicated, but it’s brutal. Brent crude closed at $114.01 on April 30, touching $126 intraday, up from roughly $70 when the US-Iran conflict began on February 28, per market data. India imports 85% of its oil requirements. Every sustained move higher in crude means more dollar demand from oil marketing companies, which directly pressures the rupee, which in turn makes oil more expensive in local currency terms, which widens the trade deficit further.
The RBI has moved aggressively to interrupt this loop. On March 29, it capped banks’ net open rupee positions at $100 million per business day. It then barred banks from offering rupee non-deliverable forward contracts to corporate clients to choke off speculative activity, a move that temporarily strengthened the rupee by 1.6% to 93.10, per BusinessToday. Some of those measures have since been partially rolled back, which is precisely why analysts at Kotak Securities place the rupee’s next meaningful support at 94.50–94.80, levels now clearly breached.
Credit Growth Was the Collateral Damage
Before the Strait of Hormuz closed, credit to consumers and businesses was growing at 14.5%, per RBI data, and the central bank was preparing to give lending a further boost by aligning bank capital deployment rules with international norms. That is now deferred. The Finance Ministry’s monthly economic review warned this week that while a supply shock is already visible, “an accompanying demand compression is a serious concern.”
That warning has a specific target: state-run banks. Per the RBI’s Financial Stability Report, December 2025, the gross NPA ratio of scheduled commercial banks fell to 2.1% in September 2025, a multi-decade low. But the same report flagged that public sector banks remain more vulnerable under stress scenarios, with MSME and priority-sector exposure as the primary risk concentration. A BMI (Fitch Group) report published in April warns that state lenders’ near-term objective may shift to “protect asset quality under stress as opposed to increasing lending”, a direct reversal of what the 125 bps easing cycle was designed to achieve.
What Economists Actually Think Will Happen
The base case, across the four institutions whose forecasts are on record, is a hold at 5.25% at the next MPC meeting, scheduled for June 3–5, per RBI’s official FY27 calendar.
Sonal Badhan, economist at Bank of Baroda, expects the MPC to hold and maintain a neutral stance but calls this the end of the rate-cut cycle. “If inflation overshoots the upper band of 6%, then there will be a chance of a rate hike towards the end of the year,” she said. CareEdge Ratings chief economist Rajani Sinha also expects a hold, noting that the immediate burden of higher crude is being partially absorbed by oil marketing companies for now. SBI Mutual Fund economists put the bar for tightening as “high,” arguing that growth risks are underpriced and a stagflationary environment calls for a fiscal rather than monetary response, despite oil running 50% above the RBI’s $70-per-barrel baseline assumption.
The one scenario that tips the consensus toward a hike: crude sustaining above $120, the rupee breaching 97, and CPI crossing 6%. None of those conditions have been met yet. CPI came in at 3.4% year-on-year in March, per government data, comfortably inside the 2–6% band. But north India is currently experiencing extreme heat waves with below-normal monsoon rainfall predicted, a combination that historically accelerates food price inflation by mid-year. When the government’s fuel subsidy rollback eventually comes, the CPI buffer shrinks fast.
The State Bank Risk Is the Underpriced Story
One angle not prominently featured in current coverage: the divergence between private and public sector banks in the event of a credit stress cycle. Per the RBI FSR December 2025, 53.1% of retail loan slippages at private banks originate from unsecured loans. Public sector banks carry their stress in MSME and agriculture books, sectors where more than 25% of nonperforming loans were concentrated last year, per Finance Ministry data. A rate hike that slows demand would hit both but in different places. The RBI’s new mandatory provisioning framework, requiring banks to provision against expected future loan losses starting next year, adds a capital consumption layer on top of whichever stress scenario materialises.
The June MPC meeting is the line in the sand. The consensus across Bank of Baroda, CareEdge, and SBI Mutual Fund is a hold on June 5. A hike becomes the base case only if crude stays above $120 past July and CPI crosses 5.5% in the May or June print, neither of which has happened yet. Malhotra’s cheap-money era is not over. But the conditions that could end it are now clearly visible.
Also Read: Rupee Hits Record Low — Could Rising Crude Oil Prices Push It Even Weaker?
FAQ
What is the RBI repo rate right now?
5.25%, held since the April 8, 2026 MPC decision. The RBI cut 125 basis points in total from 6.50% between February 2025 and December 2025, per RBI data.
When is the next RBI MPC meeting?
June 3–5, 2026, per the RBI’s official FY27 monetary policy calendar published March 23, 2026. The rate decision is announced on the third day, June 5.
Has the RBI intervened to support the rupee?
Yes, with some of its strongest measures in over a decade. In late March, the RBI capped bank forex position limits at $100 million per day and banned NDF contracts for corporate clients, per RBI circulars. The rupee briefly recovered 1.6% on the NDF ban before resuming its slide. Some measures have since been partially reversed.
