Indian Rupee: RBI pause and Special swap inflows – DBS

DBS economist Radhika Rao expects the RBI MPC to keep the benchmark rate at 5.25% with a neutral stance and cautious guidance. The report highlights focus on core inflation, monitoring of West Asia risks and US Fed policy, and implications for the Rupee and INR bonds, including a steepening yield curve and constructive onshore market conditions.

RBI pause and inflows

"The RBI monetary policy committee (MPC) is expected to keep the benchmark rate unchanged at 5.25% this week, whilst maintaining the neutral stance as well as economic projections."

"We anticipate a cautious policy statement, that underscores the need for continued vigilance on the inflation outlook, while placing greater emphasis on core inflation as a more reliable measure of underlying price pressures rather than headline inflation, which has been influenced by both domestic and global supply-side factors."

"Against this backdrop, the committee is likely to push back against market expectations of a more aggressive tightening path reflected in implied rates. For the path ahead, the markets will be watchful of developments in West Asia and signs of any change in the US Fed’s policy outlook in second half of 2026. These developments will have important implications for the rupee, capital flows, and interest rate differentials."

"In its second official update, the RBI announced that a cumulative $40.1bn has been raised under the special swap windows by 31-July, up from $20bn by mid-July."

"The total scale of inflows could be closer to our revised estimate of ~$65-70bn, as compliance matters are resolved and greater clarity emerges on tax matters in selected jurisdictions for leveraged-deposits."

"Banks are, nonetheless, expected to benefit from these flows, with the landed cost of these deposits likely to cheaper than the prevailing cost of domestic deposits."

"The impact of these inflows would typically have been evident in both foreign exchange reserves and the currency, neither of which has responded commensurately with the scale of the flows for now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)