The rupee’s repeated record lows are unlikely to deter the Reserve Bank of India (RBI) from considering a cut in interest rates on Wednesday, with the central bank expected to prioritise growth amid escalating US trade tensions, according to analysts at Nomura, Capital Economics and Emkay
Global.
Their view diverges from the broader consensus that the RBI will hold the policy repo rate steady at 5.50 per cent. The rupee, down 3.7 per cent against the dollar so far this year, is among Asia’s worst-performing currencies.
According to a Reuters report, Capital Economics said subdued inflation, slowing growth from US tariffs, and ample foreign exchange reserves to manage volatility give the RBI scope to cut rates.
Madhavi Arora, chief economist at Emkay Global, argued that India’s loss of export competitiveness due to higher US tariffs and the inclusion of services in the dispute justifies a degree of depreciation.
“Such depreciation would act as a natural stabiliser for a weaker current account deficit, rather than being misread as a rate-easing deterrent,” she said.
Nomura’s chief economist Sonal Varma added that inflation remains well below target, and the drag from tariffs is likely to outweigh the consumption boost from recent GST cuts.
Overseas fundraising
The RBI on Monday eased rules on overseas fundraising for domestic lenders. Banks can now issue perpetual debt overseas—both in foreign currency and rupee-denominated bonds—up to 1.5 per cent of risk-weighted assets (RWAs), with such instruments qualifying as Additional Tier-1 (AT1) capital.
While the 1.5 per cent cap was in place earlier, overseas issuance was restricted to less than half the ceiling. Removing this cap gives larger banks the flexibility to tap international markets. The last such issuance by a state-owned lender was in 2016, when SBI raised $300 million via dollar perpetual bonds.
Anil Gupta, senior vice president and co-group head, Icra, said domestic AT1 rates have so far been more attractive, but with developed economies lowering policy rates—New Zealand, Australia and England in August, followed by the US Federal Reserve in September—foreign issuance may gain traction as Indian bond yields remain firm.
Dual benefit
RBI has also proposed changes to floating rate retail and MSME loans. Banks may now reduce spread components earlier than three years to benefit borrowers, while the mandatory option to switch to fixed rates at every reset will become discretionary, giving lenders greater flexibility.