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The RBI just raised rates for the first time since 2023. Here's why it matters.
On Wednesday the RBI did something it hadn't done in nearly four years. Here's how I read the decision, what the market did with it, and what it means for the rupee call I made in August.
On 7 October the Reserve Bank of India raised the repo rate by 25 basis points, from 5.25% to 5.50%. The Monetary Policy Committee voted for it unanimously. It's the first hike since February 2023.
The hike itself is small. The language around it matters more. The RBI changed its stance from "neutral" to "calibrated tightening", and Governor Sanjay Malhotra said rate cuts are off the table for the near term. That's a big turn for a central bank that spent most of the last eighteen months going the other way. The easing cycle that started in February 2025 cut rates by 125 basis points in total, and the RBI then held at 5.25% for four meetings in a row.
So the real question isn't "why 25 basis points?" It's "why did the direction flip?"
What changed
I count three things.
Inflation is drifting the wrong way. CPI inflation was 4.82% in August, up from 4.45% in July. That's the third month in a row above the RBI's 4% target. It isn't a crisis, but the direction matters more than the level. The RBI now expects inflation to average 5.2% this financial year, and it pencils in 6% for the October–December quarter.
Oil won't calm down. Brent touched $101 a barrel on the day of the decision. In my rupee paper I argued that oil is the single biggest threat to India's external position, because we import roughly 85–89% of our crude. Expensive oil goes straight into fuel and transport costs, and from there into almost everything else.
The weather. The RBI pointed to a weak south-west monsoon and strong El Niño conditions as risks to food prices. Rate hikes can't make vegetables cheaper. What they can do is stop a food shock from turning into a general belief that prices will keep rising.
Malhotra put the logic in one line: policymakers "have chosen to reinforce inflation credibility before risks become entrenched." In plain English, that means hiking a little now so they don't have to hike a lot later.
Can the economy take it?
The RBI still projects 7.1% real GDP growth for 2026–27. But look at its own quarterly numbers: 7.2%, then 6.9%, then 6.8%. The central bank is forecasting a slowdown through the year, so it clearly knows this hike has a cost. My guess is it moved now precisely because growth is still around 7%. A 25 basis point hike is affordable at 7% growth in a way it wouldn't be in a downturn.
How the market took it
Not well, at first. The Sensex fell more than 500 points in early trade to about 72,520, and the Nifty dropped to about 22,578, before both pared their losses. The 10-year government bond yield rose to 7.27%. The rupee weakened too, to around ₹96.4–96.6 per dollar.
The bank stocks were the interesting part. ICICI Bank, Axis Bank, SBI and Kotak Mahindra Bank were among the Sensex's gainers that day. That sounds backwards, since higher rates are supposed to be bad for stocks. But banks work differently. A large share of their loans is linked directly to the repo rate and reprices almost immediately, while deposit rates catch up slowly. In the short run, a hike can actually widen a bank's net interest margin. Autos and real estate traded weak, which makes sense: those businesses depend on their customers borrowing cheaply.
What it means for my rupee call
In August I forecast that the rupee would stay below ₹97 per dollar through 31 December, most likely in a ₹95.50–96.50 range. At around ₹96.5 we're now sitting right at the top of that range.
In theory, a rate hike should help the rupee, because higher Indian rates make rupee assets more attractive compared with dollar ones. On the day, though, the rupee fell. My read is that the market treated the hike as confirmation that the oil and inflation pressure is real, not as fresh support for the currency.
I'm not changing the forecast yet. The RBI's reserves and its willingness to intervene, which were the core of my bull case, haven't gone anywhere. But the margin of safety is thinner than it was in August. If Brent stays above $100 for long, I'll have to revisit.
What I'm watching next
September's CPI number. If it comes in above 5%, another hike in December starts to look likely.
Brent at $100. That's where the risk to both inflation and the rupee gets real.
Banks versus rate-sensitive sectors. If the margin story holds, banks should keep outperforming autos and real estate.
On my own paper desk I'm keeping position sizes small until the picture is clearer.
Sources
Business Standard, "RBI MPC hikes repo rate by 25 bps to 5.5%, near-term cuts 'off the table'", 7 October 2026.
BigGo Finance, "India's Central Bank Delivers First Rate Hike in Nearly Four Years on Inflation Fears", 7 October 2026 (CPI, Brent and rate-path figures).
The Federal, "Bank stocks rebound as RBI hikes repo rate; Sensex, Nifty trim early losses", 7 October 2026.
Zorawar Singh Gill, "Will the Indian Rupee Stabilize Below ₹97/$ or Breach ₹97 by December 31, 2026?", August 2026 (on this site).
Markets · 9 October 2026 · 6 min read
Foreign money is leaving India for AI. Rejection, or just rotation?
Foreign investors have pulled record amounts out of Indian stocks this year. I went through the flow data to work out whether they've given up on India or are just chasing something shinier.
2026 has been a rough year for foreign money in Indian stocks. By mid-August, foreign portfolio investors (FPIs) had sold a net ₹1.9 lakh crore of Indian equities. That's already more than they sold in all of 2025 (₹1.66 lakh crore) and more than in 2022 (₹1.21 lakh crore). March alone accounted for ₹1.18 lakh crore.
When numbers that big show up, the easy headline is "foreigners have lost faith in India." Having dug into the data, I don't think that's what's happening.
Where the money is going
The short answer is AI. Global funds have been piling into the companies that build AI: chipmakers, memory makers and the big US tech platforms. Most of those are listed in the US, Taiwan and South Korea. NSE's chief executive, Ashish Chauhan, said recently that the US market has grown from about $25 trillion to about $75 trillion on the back of the AI theme, with similar runs in Korea and Taiwan.
India simply doesn't have many listed companies that sell the "picks and shovels" of AI. We have no TSMC and no big memory-chip maker. A global fund that wants more AI exposure has to fund it from somewhere, and an expensive, non-AI market like India is an obvious place to sell.
Two things made it worse:
The rupee. It slid from about ₹90 to about ₹96 per dollar this year. A dollar-based investor lost around 6–7% on the currency alone, before the stocks moved at all.
US yields. The US 10-year Treasury yield climbed to around 4.8% after the Fed's hawkish turn in August. When you can earn that on US government debt, emerging-market risk has to work harder to look worth it.
Why I think it's a rotation, not a rejection
If foreign investors had really given up on India, the selling would be steady and one-way. It isn't. The flows have tracked the AI trade almost month by month.
In July and August, when the chip rally wobbled, FPIs turned net buyers of Indian equities, by about ₹11,045 crore and ₹10,231 crore respectively according to NSDL data. In early September a report from Elara Capital noted that weekly redemptions from India-focused funds had slowed to about $100 million, from $366 million three weeks earlier, while redemptions from Taiwan and South Korea had overtaken India's. The trade that had been crowded was the one being unwound.
Then September flipped again. By 19 September FPIs had pulled out ₹23,676 crore. The RBI's own bulletin linked the reversal to renewed tension in West Asia and rising global bond yields. Neither of those has anything to do with how Indian companies are actually doing.
Meanwhile the RBI still projects 7.1% GDP growth this year. Money that leaves while growth is still around 7% is reacting to what's happening elsewhere, not to India's fundamentals.
Will it come back?
Chauhan thinks so. "AI has reached its peak. When this cycle ends, this money will come back," he said. That's his personal view, and nobody can call the top of a theme like AI with any confidence. I'd put it more modestly: the money comes back when the AI trade stops being so crowded, the rupee stops falling, and Indian earnings growth gives investors a reason to look again.
The rupee is the part I've spent the most time on. In my August paper I forecast it would hold below ₹97 through December. If that's right, one of the biggest reasons for foreigners to stay away starts to fade. If it's wrong and the rupee breaks ₹97, I'd expect the selling to continue whatever happens to AI.
What I take from it
Foreign selling can push a stock's price down without anything going wrong inside the business. For a patient investor that's an opportunity, but timing it is hard, because flows can keep going the "wrong" way for longer than seems reasonable.
The stocks where foreign ownership is heaviest, the large private banks and the big IT names, are the ones that get hit hardest when FPIs sell. I'm keeping an eye on them on my paper desk. You can follow along in the decision log.
Sources
Kotak Neo, "FPI Outflows Near ₹1.9 Lakh Crore In 2026: What's Driving It", 17 August 2026.
The Tribune / ANI, "FPI equity withdrawals cyclical, money may return as AI boom peaks: NSE MD & CEO Ashish Chauhan", 26 September 2026 (NSDL monthly flows, RBI bulletin).
The Hans India / IANS, "India outflows slow relative to Taiwan, South Korea: Report" (Elara Capital), 11 September 2026.
Business Standard, "RBI MPC hikes repo rate by 25 bps to 5.5%", 7 October 2026 (GDP forecast).
Zorawar Singh Gill, "Will the Indian Rupee Stabilize Below ₹97/$ or Breach ₹97 by December 31, 2026?", August 2026 (on this site).
Research paper · August 2026 · 12 min read
Will the Indian Rupee stabilize below ₹97/$ or breach ₹97 by December 31, 2026?
A macroeconomic analysis of oil prices, capital flows, RBI intervention and U.S. monetary policy. By Zorawar Singh Gill.
Figure 1: USD/INR exchange rate, January–August 2026. Source: Google Finance.
Key observation: As shown in the graph, the Indian rupee has depreciated substantially during 2026, moving from approximately ₹90/$ at the beginning of the year to around ₹95/$ by August. USD/INR also reached approximately ₹96.50/$ on July 23, bringing the exchange rate close to the ₹97/$ threshold. This sharp depreciation raises the question of whether the rupee can stabilize around current levels or experience further depreciation by the end of 2026.
1. Executive summary
This paper forecasts that the Indian rupee will stabilize below ₹97/$ by December 31, 2026, most likely settling in the ₹95.50–96.50 range. Bearish pressures like elevated crude oil prices, United States monetary policy uncertainty, and capital-flow volatility remain the main threats to this outlook, having pushed USD/INR as high as ₹96.50 in July 2026. However, these are outweighed by RBI intervention, record foreign-exchange reserves ($740.8 billion as of late August), and renewed foreign equity inflows ($3.1 billion in August alone). Cumulative outflows earlier in 2026 remain a lingering risk. On balance, this paper concludes that a sustained breach of ₹97 is less likely than stabilization below it.
2. Background and context
The Indian rupee (INR) has been in an extended downtrend against the US dollar (USD) in 2026. Having started the year at around ₹90 per USD, the currency then gave up ground sharply as external factors weighed on it, before testing a peak near ₹96.50 per USD in late July 2026. A recovery started in late August and the currency closed at ₹95.16 per USD on August 31, 2026, on inflows of foreign capital into the market and steps taken by the Reserve Bank of India (RBI) to shore up the currency. The movement from around ₹90 to a peak of nearly ₹96.5 illustrates the magnitude by which the rupee moved against the dollar and the impact that both external and internal factors can have on the currency pair.
This is an especially important question as the direction of the rupee will be determined by a combination of external and internal factors in the coming months. A sharper rise in crude oil prices and changes in monetary policy by the Federal Reserve (Fed) can weigh on the currency, while inflows of foreign capital and steps by the RBI can prop it up. The ability of the RBI to stabilize the currency has also improved, with foreign exchange (forex) reserves hitting a record $740.80 billion as of August 28, 2026, providing the central bank with the firepower to stabilize the currency. At the same time, the resilience of the rupee has been illustrated by its recovery to ₹94.95 per USD on September 1, 2026. The question for the remainder of 2026 is whether these factors will be enough to keep USD/INR below the critical level of ₹97, or if the fall will continue to a new record low.
3. Data (key observations)
Figure 2: USD/INR exchange rate, January–August 2026. Source: Board of Governors of the Federal Reserve System (US), via FRED, DEXINUS daily series.
Rather than falling in a straight line, the rupee's 2026 slide has come in two distinct phases. Between January and April, it weakened almost continuously, sliding from around ₹90 toward ₹94–95. From May onward, though, the trend flattens into a volatile back-and-forth, bouncing between roughly ₹94.5 and ₹96.5 without ever settling into a clear direction. There are two separate peaks, one around May–June and another in July, and each time the rupee pulls back toward ₹95 before pushing higher again. Both peaks came close to ₹97, but neither actually broke through it. This says something useful about what to expect next. Whether the rupee keeps testing ₹97 or finally breaks free of this range probably comes down to whether oil shocks (see Figure 3) keep arriving in waves, or whether the RBI's growing reserve stockpile is finally enough to anchor the currency below ₹96 for good.
Figure 3: Brent crude oil prices, January–August 2026. Source: U.S. Energy Information Administration (EIA), Europe Brent Spot Price FOB, monthly averages.
Brent crude oil prices experienced significant fluctuations during the first eight months of 2026. They increased considerably from only $67 per barrel in January to a peak of $117.29 in April, a sharp three-month rise. They then started to decline just after reaching the high in April and dropped to $84 per barrel by July. A modest recovery followed in August, when prices rose to approximately $91 per barrel. In short, Brent saw a sudden surge, an equally sharp drop, and then a rebound.
4. Analysis: bear case (weakens past ₹97)
Oil prices
India imports 85–89% of its crude oil, and every $10/barrel rise adds an estimated $17–18 billion to the annual import bill and widens the current account deficit by 0.4–0.5% of GDP. Brent already spiked to $117.29/barrel in April amid the US-Iran conflict, and renewed strikes in early September pushed it back near $95–96. A fresh escalation or a Hormuz disruption could see the price of oil jump higher again, sending USD/INR towards ₹97.
Capital flows (FPI/FDI)
FPIs are heading for record annual net outflows from Indian equities for 2026 ($24.6 billion YTD), driven by a structural rotation toward AI-linked markets like Taiwan and South Korea. August's $3.1 billion inflow could well be temporary if that global rotation kicks in again. A return to net outflows would strip the rupee of one of its recent supports.
RBI intervention
A lot of the RBI's $740.80 billion reserve build came down to one thing: the FCNR(B)/ECB swap facility, which pulled in over $136 billion before closing on August 31. Now that it's shut, reserve growth could slow down fast. Systematix brokerage isn't convinced this fixes anything long-term either, calling it more of a delay tactic and pointing to a possible 6.5% annual depreciation path ahead.
US monetary policy and Fed rates
Fed Chair Kevin Warsh didn't help matters with his hawkish speech at Jackson Hole in late August, which sent the 10-year Treasury yield up to 4.80%, its highest point since late 2023, as markets started pricing in the chance of rate hikes again. That matters because a genuinely more hawkish Fed tends to pull money back into dollar assets, strengthening the dollar broadly against emerging-market currencies. If that trend holds, it could easily undo the rupee's recent stabilization, and it wouldn't have anything to do with how India itself is doing.
Trade deal status
Even with the February tariff-cut framework in place, the full US-India Bilateral Trade Agreement still isn't done as of September 2026. That's worth watching closely, because the U.S. buys around 22% of India's exports, so any stall or breakdown in these talks wouldn't just be a diplomatic setback; it would bring back the tariff risk premium that was already weighing on the rupee earlier this year.
5. Analysis: bull case (stabilizes or recovers)
RBI defense levels
The RBI has significant scope to defend the rupee if selling pressure increases. Its foreign-exchange reserves hit a record $740.80 billion in the week ending August 28, giving the central bank a large buffer to intervene in the currency market. The RBI has already been actively managing the rupee through dollar sales and other foreign-exchange operations. More than $136 billion of foreign-currency inflows from special schemes also bolstered the reserve position this year. While some of this came on a temporary basis, the overall reserve position gives the RBI significant firepower to prevent a disorderly rupee move.
Trade deal progress
The improvement in U.S.-India trade relations is another factor providing some support to the rupee. In February the U.S. lowered its reciprocal tariff on Indian goods to 18% and scrapped an additional 25% levy that applied to India's Russian oil purchases. In turn, India agreed to buy $500+ billion in U.S. energy, technology and other products over the next five years while cutting tariffs on a range of U.S. goods. While talks to finalize a Bilateral Trade Agreement are still ongoing, the February framework eased some of the concerns that had been weighing on Indian markets at the start of the year. Further progress would likely be positive for markets and add to the tailwinds for the rupee.
Export strength (IT and pharma)
India's large services export sector is another key support for the rupee. Services exports totaled a record $421.3 billion in FY26, while telecommunications, computer and information services generated $206.6 billion. Pharmaceutical exports also came in at $28.29 billion during April–February FY26, supported by resilient global demand for Indian medicines and vaccines. The services and pharma sectors are important sources of foreign-currency earnings and act as a counterweight to the dollar demand created by India's large merchandise import bill. Unlike short-term portfolio flows, they are a more consistent tailwind for the rupee.
Oil price relief
Oil prices continue to be a key variable for the rupee. Brent crude climbed to $117.29 a barrel in April but then came down sharply in the following months, partly easing the burden on India's import bill. Prices have since started rising again on geopolitical worries, so oil remains a factor, but not as critical as in April. With prices stabilizing rather than rising sharply, the RBI continuing to use its reserves, and strong exports, the prospect of the rupee staying within the ₹95–96 range through December is distinctly possible.
6. Synthesis
Weighing the two cases against each other, the bull case is stronger. That's not because the bear-case risks are weak, but because they're mostly conditional on something new going wrong, while the bull-case supports are already in place and measurable today.
Take oil, the single biggest bearish threat. The April spike to $117.29 was real, but it required a specific shock (the US-Iran conflict) to happen, and even with tensions flaring again in early September, Brent has settled back near $95–96, well below its peak. For oil to be the thing that pushes USD/INR past ₹97, it would need a fresh, larger escalation, not just a continuation of what's already priced in. That's a possibility, not a probability.
Capital flows tell a similar story. Yes, FPIs are on track for record annual outflows, but that pattern is largely a function of a global rotation toward AI-linked markets rather than an India-specific loss of confidence, and August's reversal ($3.1 billion of inflows, the strongest month in almost two years) shows that a turnaround is entirely possible when domestic fundamentals look decent. The latest data point toward a possible shift back toward inflows rather than a continuation of the earlier outflow trend.
By contrast, the RBI's defense isn't conditional on anything else going right; it already exists. $740.80 billion in reserves, over 10 months of import cover, and a demonstrated willingness to intervene continuously rather than only on big swings are all facts on the ground today, not projections. Even accounting for the risk that the FCNR(B)/ECB facility's closure slows future reserve growth, the RBI is starting from a stronger position than at any other point in 2026. Add to that the steady, largely oil- and Fed-independent dollar inflows from IT and pharma exports, and the rupee has more structural support underneath it than the bear case's risks would need to overcome.
The Fed remains the genuine wildcard, and it's the one risk in the bear case that isn't really about India at all. A sustained hawkish turn, if it actually materializes, could offset everything else on this list. But the signal as of early September, with Governor Waller pushing back against Chair Warsh's hawkish tone, suggests the Fed itself hasn't settled on a direction either, which makes it hard to weight this as more likely than not.
On balance, the rupee's floor looks firmer than its ceiling looks fragile. The bear case describes real risks that would need to intensify from where they stand today; the bull case describes support that is already largely in place. That asymmetry is why this paper's forecast leans toward stabilization below ₹97 rather than a breach.
7. Forecast, risks and trade implications
Base-case forecast: ₹95.50–96.50/$ by December 31, 2026.
Given the information available up to August 31, 2026, my base case is that the Indian rupee will remain stable below ₹97/$ and trade in a range of ₹95.50–96.50/$ until the end of 2026. The forecast rests on the RBI's large foreign-exchange reserves of $740.80 billion, the central bank's ability to control currency volatility, the return of foreign portfolio inflows in August, and the expectation of lower oil prices.
What would prove this forecast wrong?
The forecast will be wrong if USD/INR rises above ₹97 and stays there at the end of 2026. The key drivers would be a new oil price spike, a resumption of heavy FPI outflows, and a stronger-than-expected U.S. dollar driven by a more hawkish Federal Reserve.
Trade implications
If the rupee stays below ₹97, as this paper expects, that's good news for importers and firms that make payments in dollars: currency costs become easier to predict and foreign-currency risk falls. IT and pharmaceutical exporters continue to benefit as well, because most of their income is received in dollars, although the benefit is smaller than it would be with a weaker rupee.
If the rupee crosses ₹97, the picture reverses. IT and pharmaceutical exporters benefit, because each dollar earned converts into more rupees. Oil importers and firms with dollar-denominated debts and costs suffer from higher costs and more expensive imports.
8. Conclusion
Overall, based on data available up to August 31, 2026, the rupee is more likely to stabilize under ₹97/$ until December 31, 2026 than to break that level. High foreign exchange reserves and the RBI's readiness to intervene form a protective layer against further depreciation, while FPI inflows in August and strong services and pharmaceutical exports add some strength. Still, the rupee will remain highly dependent on oil prices, international capital flows and US monetary policy. A sharp rise in crude prices or renewed outflows of foreign capital could quickly affect the currency. Under these conditions, a base case of ₹95.50–96.50 per dollar through December 31, 2026 is still the most probable outcome.
Sources
Reuters, "Foreign buying in Indian stocks hits 23-month high in August, depository data shows", Bharath Rajeswaran, August 31, 2026.
Business Standard, "India's forex reserves jump to record $740.80 billion", week ending August 28, 2026.
Board of Governors of the Federal Reserve System (US), "Indian Rupees to U.S. Dollar Spot Exchange Rate (DEXINUS)", via FRED.
U.S. Energy Information Administration (EIA), "Europe Brent Spot Price FOB", monthly averages, and Statista Brent crude data.
CNBC, "Fed Governor Waller indicates he will support holding rates steady at September meeting", September 3, 2026; PBS News, "Fed governor Waller muddies outlook on possible rate hike later this month", September 3, 2026.
The White House, "Fact Sheet: The United States and India Announce Historic Trade Deal", February 2026.
Press Information Bureau / Ministry of Commerce and Industry, "India's Services Exports Rise to USD 421.3 Billion in FY 2025-26", July 2026 (RBI data).
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