RBI's bumper rate cut leaves rupee exposed to fresh depreciation risk
The Reserve Bank of India's surprise 50 basis point rate cut last week may have been a shot in the arm for growth, but it could come at a cost.Analysts quoted in a Reuters report warned that the move has left the rupee vulnerable to further depreciation by eroding foreign exchange forward premiums and weakening the currency's carry trade appeal.The rupee has already lagged behind its Asian peers in 2025, weighed down by tepid capital inflows. Now, with the RBI easing faster than the US Federal Reserve, the narrowing interest rate differential is expected to keep the rupee on the back foot.The fallout has been immediate. The 1-month USD/INR forward premium—sensitive to liquidity conditions—slipped to 7.5 paisa, its lowest since November. The 1-year premium, more closely tied to the U.S.-India rate gap, dropped to 1.5250 rupees, the weakest in nearly a year.Lower forward premiums make the rupee less attractive for carry trades, where investors borrow in low-interest-rate currencies to invest in higher-yielding ones. Exporters, who typically hedge their future receivables, may find less incentive to do so. On the other hand, importers—looking to cover near-term obligations—could ramp up hedging, further pressuring the market.The result? A more volatile rupee, with fewer buffers against global shocks.The RBI's 50 bps repo rate cut, well above the expected 25 bps, came alongside a reduction in the cash reserve ratio, signalling a strong shift toward growth-supportive policy amid subdued inflation.Mitul Kotecha, Head of FX and EM Macro Strategy Asia at Barclays, told Reuters that RBI's rate cut has reduced rupee's appeal significantly. 'In a market where carry is back in focus, that hurts.'Dhiraj Nim, FX strategist at ANZ Research, told the news agency that falling premiums are a 'mild added headwind' for the rupee. He warned that if India's growth momentum stalls, there may be room for yet another rate cut.Tune InMust Watch
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