The Reserve Bank of India (RBI) maintained the repo rate at 5.25%, meeting market expectations. The RBI’s decision, reached unanimously, reflects stability in economic policy and suggests no immediate changes will occur.
The RBI slightly increased its growth forecast for the fiscal year 2025-2026 to 7.4%, up from 7.3%, with risks considered evenly balanced. Inflation is anticipated to remain within target parameters, further supporting the decision to keep interest rates stable.
Stable Exchange Rate Expectations
Additionally, expectations are for the USD/INR exchange rate to remain stable, trading in the 90-91 range following the US-India trade agreement. RBI Governor Sanjay Malhotra projected that the current rates are expected to stay in place for the foreseeable future.
Looking back at late 2025, we saw a period of significant stability after the Reserve Bank of India held the policy rate at 5.25%. This neutral stance was well-justified by a strong growth forecast of 7.4% and inflation that seemed under control. The USD/INR pair largely behaved as expected, consolidating in the 90-91 range for several weeks.
However, the situation has shifted as we move through February 2026. The latest inflation data for January came in at 5.8%, slightly above market expectations and testing the upper end of the RBI’s tolerance band. This uptick, combined with a strong January manufacturing PMI of 57.5, suggests the economy may be running hotter than anticipated.
These domestic pressures are now being compounded by a stronger US dollar globally, following recent hawkish commentary from the Federal Reserve. India’s trade deficit also widened moderately in the latest figures, putting further gentle pressure on the rupee. As of this week, we have seen the USD/INR spot rate creep up to 91.20, testing the upper boundary of that long-held range.
Preparing for a Potential Breakout
Given that implied volatility has started to rise, strategies that benefit from a potential breakout seem prudent. We see value in buying near-term USD/INR call options, such as those for the March 2026 expiry with a strike price around 91.50. This position allows for participation in a potential move higher while clearly defining risk to the premium paid.
The “Goldilocks” environment of late last year, which favored selling options to collect premium, appears to be fading. With the pair pushing against key resistance and inflation ticking up, preparing for a potential increase in currency movement is the more cautious approach. This contrasts with the fourth quarter of 2025, when low volatility was the dominant market theme.
