India's central bank, the Reserve Bank of India (RBI), maintained its policy rate at 5.25% for the third consecutive meeting, adopting a neutral stance as anticipated by 32 out of 38 analysts polled by Bloomberg, while the remaining analysts expected a 25 basis point hike [1]. The RBI, together with the government, introduced five measures to attract foreign capital, including making it easier for foreign investors to buy government bonds and stocks, and encouraging foreign currency deposits [1]. Additionally, the government granted tax exemptions to foreign institutional investors retroactively from April 1, 2026, covering interest and capital gains on government securities [1]. These steps were designed to strengthen India's balance of payments and bolster capital inflows, which led to the Indian Rupee outperforming across the board [1]. However, ongoing energy shocks, particularly due to India's reliance on crude oil imports and disruptions in the Strait of Hormuz, are expected to only slow the rupee's depreciation rather than reverse its undervaluation [1].
India's economy expanded at a robust 7.8% year-on-year in the quarter ending March, surpassing the Reuters poll forecast of 7.2% and matching the previous quarter's growth rate [2]. This growth occurred despite partial disruptions from the Middle East conflict, which began at the end of February and has since posed severe risks to India's economy, including anticipated impacts on growth and inflation [2]. In the first half of the quarter, India's trade prospects improved significantly, highlighted by a major deal with the European Union and reductions in U.S. tariffs from 50% to 10% following a U.S. Supreme Court ruling [2].
The Iran war has led to energy supply disruptions, inflating India's import bill and exerting pressure on the rupee, which has also been affected by record foreign investor outflows [2]. On Friday, the RBI raised its inflation projection for the financial year ending March 2027 by 50 basis points to 5.1%, while lowering its growth forecast to 6.6% from the previous 6.9% [2]. The government passed on global fuel price hikes to consumers in May, after temporarily holding them off, and as of April, inflation remains under the RBI's 4% target [2]. However, India is expected to face weather-related disruptions due to El Nino, which could cause crop shortages and push food prices higher [2]. The RBI stated its policy has turned "cautious" in response to deteriorating global economic conditions [2].
According to [1], policy support measures are expected to temper, but not fully offset, the depreciation risk for the rupee amid ongoing energy shocks. Meanwhile, [2] highlights that the rupee is under pressure from both energy supply disruptions and foreign investor outflows, with inflation and growth forecasts adjusted to reflect these risks.
CONCLUSION
India's robust economic growth and proactive policy measures have helped temper the rupee's depreciation risk, but ongoing energy shocks and geopolitical tensions continue to pose significant challenges. The RBI's cautious stance and revised forecasts underscore the heightened uncertainty, with inflation and currency pressures likely to persist in the near term. Market participants should remain alert to further developments in global energy and trade dynamics.