USD/INR remains broadly muted after RBI’s 25 bps hike in Repo Rates to 5.5%

The Indian Rupee (INR) stays relatively stable around 96.37 against the US Dollar (USD) following the Reserve Bank of India's (RBI) monetary policy decision. The RBI decided to increase its Repo Rate by 25 basis points (bps) to 5.5%, marking the first hike since February 2023. In their policy statement, RBI Governor Sanjay Malhotra announced that the Monetary Policy Committee (MPC) opted for a calibrated tightening from a neutral stance.

Concerning global economic outlook, Malhotra noted that higher US Dollar, Middle East tensions, and trade uncertainty are keeping global sentiment under pressure. The RBI had been expected to raise interest rates despite inflationary pressures remaining within the central bank's 2%-6% tolerance band. Strategists at Brown Brothers Harriman (BBH) had previously predicted that the RBI would hike rates to defend the INR and respond to stronger growth, with Q2 real GDP of 7.8% year-on-year exceeding their 6.4% forecast.

Meanwhile, the US Dollar regained momentum after a corrective move the previous day. In Asian trade, the US Dollar Index (DXY), which measures the Greenback's value against six major currencies, climbed 0.18% to around 102.00. Moving forward, investors will concentrate on the Federal Open Market Committee (FOMC) minutes of the September policy meeting, scheduled to be released at 18:00 GMT.

In the Fed's meeting, the central bank increased interest rates by 25 basis points and signaled at least one additional hike this year. The RBI Interest Rate Decision, announced by the Reserve Bank of India, is interpreted as positive (bullish) for the INR if the bank is cautious about inflationary trends and raises interest rates.

Conversely, a dovish outlook for the economy (or a rate cut) is seen as negative (bearish) for the currency. Sagar Dua, who has been involved in financial markets since his college days, highlighted that if the bank maintains a hawkish stance on the inflationary outlook of the economy and raises interest rates, it is seen as positive, or bullish, for the INR.