The Indian Rupee is experiencing intense multi-front pressure, pushing its value closer to the 97-per-dollar mark. According to SBI Research, the currency's depreciation stems from a combination of foreign portfolio investor (FPI) outflows, heightened demand for the US dollar, and a sharp increase in global bond yields. As of October 2, 2026, the Rupee saw its sharpest single-day decline in over two months, falling 0.5% to 96.3150 per dollar.
Protective Measures and Rate Hike Recommendation
SBI Research has strongly recommended the immediate implementation of “protective guardrails” to counter speculative forces in the foreign exchange market. The report emphasizes that the Reserve Bank of India's (RBI) capacity to intervene effectively and thwart such speculation will be crucial as currency pressure mounts.
Furthermore, SBI Research sees a strong case for a 25-basis-point rate hike at the upcoming October 5-7 monetary policy meeting. This recommendation is driven by broadening inflationary pressures, worsening global macroeconomic conditions, evolving liquidity dynamics, and a renewed global repricing of risks. The report highlighted that several central banks, including South Korea, the Philippines, the US, Japan, the euro area, and New Zealand, have already raised rates in recent months in response to inflation risks.
Broadening Inflationary Pressures
India's inflation concerns are no longer limited to a few commodities, according to SBI Research. Consumer Price Index (CPI) inflation rose to 4.82% in August from 4.45% in July, with the number of commodities contributing significantly to CPI's weighted contribution increasing from 22 in January to 51 in August. The report projects CPI inflation to reach 5.65% in September, potentially exceeding 6.5% in October and November, before easing below 6% in early 2027. Geopolitical tensions and crude oil price risks further strengthen the argument for preemptive action.
Liquidity and Monsoon Risks
Despite record foreign-currency inflows, particularly under the special swap facility which reached $143.5 billion, SBI Research challenges the notion of abundant effective liquidity. It notes that statutory requirements like CRR, SLR, and LCR constrain banks' ability to deploy incremental deposits. The research house estimates that supporting 16% credit growth in FY27 would require an additional ₹8.2 lakh crore of deposits, even accounting for FCNR(B) inflows. Core surplus liquidity is projected to decline significantly from ₹13.9 lakh crore in mid-September to around ₹7 lakh crore by December-end and ₹3.5 lakh crore by March 2027.
The 2026 monsoon, recorded as the fourth-driest since 2000 at 87% of the long-period average, poses another inflation risk, with 43% of districts receiving deficient rainfall. Maharashtra, for instance, has declared drought across 265 talukas. While Kharif sowing remained relatively resilient, strong El Niño conditions and below-normal October rainfall could significantly impact Rabi output and food inflation.
SBI Research concludes that while there's no need to "press the PANIC BUTTON" yet, policymakers and regulators should prepare for unconventional measures to safeguard broader economic interests if global macro conditions continue to evolve unfavorably.