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Minutes from the RBI’s October rate meeting reflected the hawkish pivot, where the repo rate was raised by 25bp and stance was changed to ‘calibrated tightening’. Members cited rising inflationary pressures and firm growth as reasons behind the 25bp hike. Tone of the commentary put two external members in the most hawkish camp, as they emphasised the broadening inflation risks and need for pre-emptive action, while two others were considered mildly hawkish/ neutral as they supported only incremental hikes and explicitly rejected signalling a prolonged tightening cycle. Governor Malhotra highlighted emerging signs of inflation becoming more generalised. With inflation set to rise to 6% in CY4Q, the door remains open for a back-to-back hike in December.
In markets, bond yields stayed high, while the rupee appreciated on the back of FX regulatory measures (India: Degrees of rupee defence). As restrictions gained traction, the rupee has strengthened by around 1.5%/USD this month, defying the usual headwinds from rising oil prices and subdued global risk sentiment, while FX forward premiums remain elevated. Inflows towards the country’s biggest ever equity IPO also contributed to FX gains on Wed. Scrutiny of FX outflows continued with the RBI reportedly seeking more details on large-scale overseas direct investments (ODI), especially those above $1bn and beyond the regulatory cap of 4x net worth of the domestic company investing abroad, according to the press. ODI outflows had risen sharply in the past five years, before stabilising in 2026.
System liquidity compressed sharply on account of seasonal cash leakage and tax outflows, in addition to the scheduled absorption measures. The RBI subsequently conducted a VRR auction worth INR 1trn to inject liquidity. This reinforced the central bank's two-track approach: maintaining a tightening bias at the policy level while retaining the flexibility to alleviate episodic liquidity strains through targeted operations. The spike in oil prices, added to the rise in INR bond yields, with 10Y benchmark rates in the 7.35-7.45% range. All bids at a T-bill auction were rejected yesterday, signalling discomfort with the high ask. For now, the currency is exhibiting limited reaction to external developments, while bonds are set to remain under pressure as oil supply fears return to the table.
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