Natixis expects the Reserve Bank of India to remain on hold in August before raising rates by 50 basis points later in 2026, as persistent Rupee weakness and rising inflation threaten India’s financial outlook.
The US Dollar to Indian Rupee (USD/INR) exchange rate ended July near 95.40, leaving the Rupee around 6% weaker since the start of 2026.
USD/INR has risen from an opening level near 89.98 to a year-to-date high above 97.12, although the pair has eased from late-July levels close to 96.90.
The chart shows the USD/INR exchange rate remaining above its 50-day moving average, while the latest retreat has pulled it just below the shorter 20-day measure.
See more historical charts here.
Natixis believes the Reserve Bank of India may eventually have to raise interest rates to restore confidence in the Rupee and prevent inflation expectations from becoming unanchored.
The bank expects the RBI to leave its policy rate unchanged in August, but forecasts 50 basis points of tightening over the remainder of 2026.
That would lift the policy rate from 5.25% to 5.75% by year-end, followed by a further rise to 6.00% in 2027.
India’s inflation backdrop has deteriorated.
Natixis expects consumer inflation to have risen to 4.4% in June, with risks tilted higher because of a weak monsoon, rising food costs and renewed gains in Brent crude.
Wholesale inflation has climbed more sharply, reaching 9.9% year on year as higher oil and commodity costs squeeze company margins.
The growth picture is becoming less comfortable at the same time.
India’s composite PMI fell to 54.3 in July from 57.1 in June, while Natixis expects GDP growth to slow from 7.7% in 2025 to 6.4% in 2026.
These weaker activity indicators provide a reason for caution, particularly after the RBI delivered a cumulative 125 basis points of easing during 2025.
However, Natixis argues that the central problem is no longer simply the current account or the higher cost of imported oil.
Instead, the bank identifies India’s financial account as the greater vulnerability.
Foreign portfolio investment and direct investment flows have both weakened, while softer nominal GDP growth, slower corporate earnings and low real interest rates have reduced the appeal of Indian assets.
According to Natixis, “the big issue is the unanchored INR”, adding that continued depreciation is undermining India’s attractiveness to overseas investors.
Authorities have already introduced extensive measures to support the currency.
These include restricting gold and silver imports, removing taxes for foreign buyers of government bonds and subsidising hedging costs on foreign-currency deposits from overseas Indians.
The RBI has attracted around $20 billion through foreign-exchange deposits, but USD/INR has nevertheless remained near 95.40.
Those policies have also carried a cost.
Natixis notes that the RBI’s forward book had risen to $106.6 billion by the end of May, leaving positions that will eventually need to be unwound.
The bank therefore expects monetary policy to take a greater role.
While an immediate August hike would risk worsening the slowdown, Natixis believes higher rates will ultimately be needed to support the Indian Rupee, strengthen real yields and anchor inflation expectations before the end of 2026.
