RBI to act only if rupee volatility rises beyond a point: Neelkanth Mishra

Mishra said rupee is expected to average around 90 per dollar by June 2026 and weaken further to 92 per dollar by June 2027

The rupee’s sharp depreciation against the dollar in the past few weeks does not pose a fundamental concern and the Reserve Bank of India (RBI) will step in to contain volatility only if depreciation accelerates beyond a tolerable pace, according to Neelkanth Mishra, chief economist, Axis Bank, and head of global research, Axis Capital. 

 

Mishra is also part-time member of the Prime Minister’s Economic Advisory Council.

 

The rupee breached 91 against the dollar on Tuesday, and it has touched new lows for the last four consecutive sessions. 

 

Mishra said the rupee was expected to average around 90 by June next year and weaken further to 92 a year later, with the pace of depreciation depending on capital flows and the global risk appetite. 

The RBI is expected to absorb excess capital inflows to rebuild foreign-exchange reserves, while any transition back toward a more freely floating exchange-rate regime is likely to be gradual, a report by Axis Bank, authored by Mishra, stated.

 

Further, he said the rupee experienced a phase of managed stability after its sharp depreciation in 2022, when it weakened 11.4 per cent amid rate hikes by the United States Fed and a global repricing of risk.

 

During this period, the RBI shifted from a flexible exchange-rate approach to a more stabilised, crawl-like regime, intervening actively to curb volatility and keep the rupee within a narrow trading range.

 

He said over time strategy proved unsustainable. Heavy intervention led to a significant drawdown in foreign-exchange reserves, particularly in late 2024, when more than $88 billion was deployed over just three months.

 

As these limits were reached, the RBI was compelled to allow the rupee to break out of its trading band, triggering a swift move beyond the 90 level, he added.

 

The rupee took 474 days to move from 83 to 84 even amid global headwinds. The move from 84 to 90 took 277 trading days.

 

Separately, Mishra said the RBI was unlikely to deliver further cuts in the repo rate in the current easing cycle because the rising headline inflation rate was expected to constrain the scope for additional monetary accommodation.

 

While the policy rate is likely to remain unchanged, a “lower for longer” interest-rate environment appears to be a reasonable assumption. Headline inflation is expected to trend higher, reducing the space for further rate cuts. He expects the headline inflation rate to average around 4 per cent in 2026-27.

 

Additionally, easier liquidity conditions, stronger monetary transmission, and supply-side measures could support credit growth and flatten the yield curve, with 10-year government bond yields expected to drift toward 6 per cent in FY27.

 

On growth, he said headwinds from fiscal consolidation and unintended monetary tightening that weighed on the economy in FY25 had largely faded, driving a revival in FY26.

 

In FY27, monetary easing is expected to push growth above trend to around 7.5 per cent. According to Mishra, with a considerable economic slack still present, growth can remain above trend for some time before inflation pressures necessitate policy tightening.