The Reserve Bank of India (RBI) has reduced its policy rate by 25 basis points to 5.25%, aiming to bolster economic growth amid a favourable inflation environment. This rate cut has caused the USD/INR to hover just below its record high as markets foresee potential rate hikes over the next two years.
Following the RBI’s decision, USD/INR reached 90.0000, slightly below the previous day’s record of 90.4248. The monetary policy committee of the RBI unanimously supported the rate cut, citing that the favourable inflation outlook provides the necessary space to promote growth. Analysts report that the policy rate might be at a floor, with future hikes anticipated in the upcoming years.
Potential Rate Hikes
The swaps curve indicates a potential for future rate hikes, but there is a possibility of further easing by the RBI, which could negatively impact the INR. Core inflation in India, excluding gold, remains near the lower end of the RBI’s target range of 2%-6%. Tariff-related issues may also slow growth in the coming quarters.
With the Reserve Bank of India cutting its policy rate to 5.25%, the Indian Rupee is facing significant pressure. The USD/INR exchange rate is testing its all-time high of 90.4248, a level we have not seen before this week. Traders should anticipate continued INR weakness in the short term, as the central bank is clearly prioritizing economic growth over currency strength.
Given the risk that the RBI could cut rates again, buying USD/INR call options for January 2026 expiry seems like a sensible strategy. This approach allows for profiting from a potential breakout above the 90.5000 level while limiting the maximum loss to the premium paid. We’ve seen implied volatility on the pair increase following the announcement, making options a key tool for managing the uncertain outlook.
Underlying Economic Conditions
The central bank’s decision is supported by recent data showing India’s core inflation for November 2025 came in at just 2.9%, near the bottom of the RBI’s target range. This low inflation, combined with recent Q3 2025 GDP figures that showed growth slowing to 4.8%, gives the RBI plenty of room for further easing. These underlying economic conditions suggest that any strength in the Rupee will be temporary.
We must also consider the strength of the US dollar, which is magnifying the Rupee’s weakness. The latest US jobs report from November 2025 was surprisingly strong, suggesting the Federal Reserve will maintain its current policy, in stark contrast to the RBI’s easing stance. This policy divergence is a powerful tailwind for a higher USD/INR exchange rate.
This environment is reminiscent of the aggressive easing we saw back in 2019 when the RBI repeatedly cut rates to support a slowing economy. While the swaps market is pricing in rate hikes over the next two years, the immediate risk is to the downside for the Rupee. Selling out-of-the-money USD/INR puts is another way to position, collecting premium on the belief that the pair has a solid floor near the current levels.
