The Reserve Bank of India’s (RBI) unexpected 50 basis point rate cut has injected fresh momentum into growth prospects — but analysts warn it may come at the cost of currency stability.
According to a Reuters report, the aggressive monetary easing has exposed the rupee to heightened depreciation risk, largely due to its impact on forward premiums and the shrinking yield advantage India once held over the U.S.
📉 Why the Rupee Is Now More Vulnerable
The rupee has been an underperformer among Asian currencies in 2025, largely due to sluggish capital inflows. But the latest policy shift could intensify the pressure:
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Forward premiums, a key metric that reflects interest rate differentials and liquidity conditions, have plunged.
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The 1-month USD/INR forward premium slipped to just 7.5 paisa — its lowest since November.
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The 1-year premium dropped to ₹1.5250, its weakest level in nearly 12 months.
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These falling premiums diminish the rupee's appeal for carry trade investors, who typically profit by borrowing in lower-yielding currencies and investing in higher-yielding ones like the rupee — a trade now far less profitable.
💼 Exporters & Importers: A Split Impact
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Exporters, who often hedge their future dollar receivables, may now avoid locking in low forward rates, reducing hedge demand on the supply side.
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Importers, however, may rush to hedge upcoming dollar payments before the rupee weakens further — a move that can increase immediate demand for USD and accelerate depreciation.
🔄 Rate Gap with U.S. a Key Risk Factor
With the U.S. Federal Reserve holding rates steady for now, the RBI’s faster pace of easing means the U.S.-India interest rate gap is narrowing — reducing India's attractiveness to yield-hunting foreign investors.
📊 “The rupee’s carry trade charm is fading,” noted one analyst. “As forward premia fall, the demand dynamics in the FX derivatives market could shift rapidly.”
⚠️ What's at Stake?
While the RBI’s cut signals a pro-growth stance, it also leaves the currency more exposed to external shocks and capital flight risks. If the rupee depreciates sharply, it could raise imported inflation and widen the current account deficit, complicating India’s macroeconomic management.
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