MediumIV Macro Policy & Sovereign Debt5 October 2026, Monday
RBI meets as rupee slides and reserves suffer a record drain
The Reserve Bank of India's monetary policy committee began a three-day meeting on 5 October, with the decision due on 7 October. Ahead of the meeting, foreign exchange reserves fell by 18.3 billion dollars in the week to 25 September, the largest weekly drop on record.
RBI data cited by The Wire show reserves fell to 747.6 billion dollars as of 25 September, after a 14.88 billion dollar drop the week before. Of the latest loss, 15.6 billion came from foreign currency assets and 2.6 billion from gold valuation. On 1 October the rupee weakened to 96.3150 per dollar, a two-month low, making it Asia's worst-performing currency. The RBI is selling dollars into the market to counter pressure from oil prices and US Treasury yields.
According to LatestLY, the repo rate stands at 5.25%. CPI inflation rose from 4.45% in July to 4.82% in August. Bank of America and SBI Research expect a 25 basis point hike; SBI wrote that the balance of risks has shifted decisively towards a hike. The same report says a strong El Niño and below-average October rainfall threaten the winter harvest and add risk to food prices.
The constraint is imported energy. Crude above $100 a barrel is straining the external balance, and the RBI is spending reserves to defend the currency. Losses over the past two weeks total close to 33 billion dollars. A rate hike could support the rupee but would brake growth; continuing to defend it with reserves erodes the buffer at this pace. The 7 October decision will test whether India absorbs the oil shock through the exchange rate or through interest rates.
Talay assessment
Bottom line
The RBI meets at a point where the cost of defending the rupee with reserves is rising fast. Reserve losses of close to 33 billion dollars in two weeks increase pressure to deploy the rate tool, and two major banks expect a 25 basis point hike. While oil stays above $100, pressure on the rupee will persist whatever the decision.
Likely effects
- Rupee and reservesUncertainWeeks
A hike would widen the rate differential, support the rupee and could reduce weekly reserve spending. Without one, the defence continues with reserves.
- Indian growthNegative1–6 months
Tightening raises borrowing costs for companies and households whose budgets are already squeezed by oil prices.
- Emerging market currenciesNegative1–6 months
Using rates to defend Asia's weakest currency puts similar pressure on central banks in oil-importing emerging economies, Türkiye included.
Possibilities, ranked
- 125 basis point hike60%
The RBI raises the repo rate and backs its currency defence with rates; the reserve drain slows.
Watch: The 7 October decision and the following weekly reserve data
- 2Rates on hold, defence via reserves30%
The RBI chooses to wait, the rupee stays above 96 and reserves keep falling.
Watch: October weekly reserve data and the rupee/dollar rate
- 3Sharper tightening10%
The RBI hikes by more than 25 basis points or announces additional currency measures.
Watch: The size of the rate move in the 7 October decision
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- FX reserves (25 September)▼ $747.6bn
- Weekly change in reserves▼ −$18.3bn
- Rupee per dollar (1 October)▼ 96.3150
- August CPI▲ 4.82%