The RBI’s tougher or hawkish tone discouraged currency traders from betting against the rupee. The Indian currency is currently at its lowest value ever due to global uncertainty, although its decline has been gradual and slight.

The Reserve Bank of India (RBI) kept its policy unchanged but surprised the market with a more hawkish tone than expected.

The RBI has increased its forecast for inflation in the July-September quarter to 4.4% from the previous 3.8%. The central bank is concerned that food inflation, especially vegetable inflation, will not decrease soon.

The increase in the Q2 forecast has not been accompanied by a decrease in any of the other quarterly forecasts. This time, the RBI has announced its forecast for Q1 FY26 CPI at 4.4%. This is higher than the 4.3% expected in the previous quarter, Q4 FY25.

The RBI indicates that inflation is not consistently moving towards the 4% mark. This forecast of 4.4% is also higher than the RBI’s own MPR (monetary policy report) forecast in April, which projected a 4% consumer price index (CPI) for Q1FY26.

The RBI governor addressed concerns regarding the potential impact of a US economic slowdown on Indian growth and inflation. He emphasised that current data does not indicate a slowdown in the US economy. 

He pointed out that the US economy is growing at a rate of 2.8%, reflecting increased strength compared to the first quarter. Additionally, the governor noted that the July unemployment rate of 4.3%, which raised concerns, may have been influenced by specific one-time events. The data on the US unemployment decline released on Friday proved this prediction right.

Furthermore, the RBI governor expressed full confidence in India’s robust growth path of 7.2%. In summary, economists expecting insights from the policy statement to determine whether they need to adjust their rate-cut timeline may reconsider their expectations.

The Indian currency is experiencing historically low trading levels, primarily due to global uncertainty. However, the decline in value has been relatively gradual and moderate. To bolster the rupee, the Reserve Bank of India highlighted its substantial foreign exchange reserves, which amount to USD 675 billion. It adopted a firm stance on interest rates.

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