Published on October 12, 2026
The Reserve Bank of India has raised the repo rate by 25 basis points while altering its policy stance to signal that further rate increases are likely in the future.
According to the central bank, inflationary pressures are rising and could remain near or above the upper tolerance band of 6 per cent for the next two to three quarters, with inflation expectations currently hovering around 10 per cent.
While food inflation driven by a poor monsoon and geopolitics forms a bulk of this pressure, the central bank notes that second-order impacts on finished goods and wages necessitate policy intervention to prevent a wage-price spiral.
Key Points Of The Policy And Economic Outlook
- The Reserve Bank of India raised the repo rate by 25 basis points amidst rising inflation and economic growth considerations.
- India recorded annual merchandise imports of $830 billion and exports of $476 billion over the last 12 months.
- The rupee depreciated by 4.7 per cent in 2025 and 7 per cent year-to-date.
- The central bank’s short-forward book swelled to $200 billion by August.
Why Currency Depreciation Matters For Inflation
India recorded annual merchandise imports of $830 billion against exports of $476 billion over the last 12 months, making the economy vulnerable to the rapid pass-through effects of a depreciating currency.
A stable currency serves as a vital barometer for attracting capital flows, whereas a large depreciation erodes portfolio returns and discourages foreign investors.
Because the country maintains a structural current account deficit funded by capital flows, eroding inflows present a fundamental challenge to macroeconomic stability.
Liquidity Pressures And The Forward Book
The central bank highlighted external risks as a primary concern in its policies, yet currency markets remain unconvinced as the rupee trades closer to its May 2026 lows of 96.96 per dollar.
Foreign currency non-resident bank deposits come with an equivalent liability in the form of a large outstanding short-forward book, which reached $200 billion by August.
This liquidity deluge has provided commercial banks with a breather, allowing them to delay raising deposit rates during repo hikes while benefiting from higher lending rates.
Global Central Bank Actions
Global central banks have actively hiked interest rates to defend their currencies and curb inflation, with Indonesia raising rates by 100 basis points, South Korea by 50 basis points, and the Philippines by 75 basis points.
Additional hikes include 50 basis points by South Africa, 100 basis points by Australia, and 50 basis points by New Zealand.
According to Anitha Rangan, Chief Economist at RBL Bank, currency defence requires addressing both interest rate differentials and entrenched inflation to secure financial stability.
Anitha Rangan, Chief Economist, RBL Bank
Frequently Asked Questions
Why did the Reserve Bank of India raise the repo rate?
The central bank raised the repo rate by 25 basis points to counter rising inflation pressures that are approaching or exceeding the upper tolerance band of 6 per cent and to address potential wage-price spiral risks.
How does currency depreciation impact the Indian economy?
Currency depreciation accelerates pass-through inflation given high merchandise imports, erodes foreign portfolio returns, and challenges the structural current account deficit that relies on capital flows for funding.
Stay Updated with the Latest News and Current Affairs
Discover more from Current Affairs World
Subscribe to get the latest posts sent to your email.
