RBI Holds Rates Amid Currency Pressure, Signals Shift to Normalization

The Reserve Bank of India (RBI) kept its repo rate unchanged at 6.5% in its latest monetary policy review, marking a decisive pause in its easing cycle. This decision comes as the INR/X (USD/INR) exchange rate touched 83.72, its weakest level since late 2023, amid heightened foreign portfolio outflows and global risk aversion. The central bank cited inflationary pressures and a strengthening domestic economy as key factors in its stance. The decision follows a surge in government spending, with capital expenditure rising 18% year-on-year in the first quarter of FY2026-27, and a recently announced U.S.-India trade agreement that reduced tariffs on 70% of Indian exports, including textiles and pharmaceuticals. This development has boosted investor confidence in India’s long-term growth trajectory. Despite the rupee’s recent depreciation, the RBI emphasized that inflation remains within its target band of 2% to 6%, with headline inflation at 4.7% in February 2026. The central bank also noted that foreign exchange reserves stood at $682 billion, providing a buffer against external volatility. Market participants are now pricing in a 65% probability of a rate hike by September 2026. The policy shift is expected to influence global emerging market dynamics, with the EMX index rising 1.3% and the SPX showing modest gains as capital flows increasingly favor India over other high-yield emerging markets. The rupee's stability may also help reverse recent outflows, which reached $1.2 billion in February alone.