The Reserve Bank of India (RBI) decided to maintain its policy rate at 5.25% after implementing 125 basis points of cuts in 2025. This decision aligns with market expectations, signalling the end of the easing cycle while maintaining a neutral stance. Governor Malhotra conveyed that rates are likely to remain steady over the next 9 to 12 months, despite market speculations of future hikes.
The Indian Rupee is not performing well against all emerging market currencies. This trend is attributed to the RBI’s commitment to maintaining steady rates and the statement that the real rate of interest is still comparatively high.
Recent Trade Agreement Between Us And India
A recent trade agreement between the US and India may influence the USD/INR exchange rate, potentially reversing the gains made during heightened trade tensions in August. At that time, the US imposed a 50% duty on Indian goods, escalating trade conflict. The trade deal could help stabilise the currency pair, easing tensions.
Looking back at the Reserve Bank of India’s stance in 2025, the signal for steady rates at 5.25% was a clear dovish pivot. However, the economic reality has since shifted dramatically, challenging that forward guidance. Recent data shows India’s CPI inflation has accelerated to 6.5% in January 2026, pushing firmly above the RBI’s 6% tolerance ceiling and making the old neutral stance difficult to maintain.
The optimism following the US-India trade deal last year provided only temporary relief for the rupee. While we saw USD/INR pull back from its 2025 highs, the pair has since climbed to around 84.75 as broad dollar strength and domestic inflation concerns resurface. This trend has been fueled by a widening interest rate differential, with the US Federal Reserve holding rates firm.
Rise In Implied Volatility For Usd Inr Options
Given this backdrop, we are seeing a notable rise in implied volatility for USD/INR options ahead of the next RBI meeting. Traders should consider positioning for a hawkish turn from the central bank, which was unthinkable when we were looking at this last year. Strategies like buying call options or call spreads on USD/INR could protect against further rupee depreciation if the RBI disappoints the market by not hiking rates.
The market is now actively pricing in a policy shift, with overnight index swaps pointing to at least 50 basis points of rate hikes by mid-2026. This contrasts sharply with Governor Malhotra’s dovish commentary from 2025, setting up a potential conflict between past guidance and present data. This suggests that even a small hike could cause significant currency movement as the market digests the end of the steady-rate policy.
