The Reserve Bank of India (RBI) has kept the repo rate steady at 5.25%, which aligns with what the market expected. This unanimous decision shows a commitment to stability in economic policy, indicating that there will be no changes anytime soon.
The RBI has slightly raised its growth forecast for the fiscal year 2025-2026 from 7.3% to 7.4%. The risks appear balanced, and inflation is expected to stay within target limits, which supports the decision to keep interest rates as they are.
Stable Exchange Rate Expectations
Expectations are for the USD/INR exchange rate to stay steady, trading in the 90-91 range due to the recent US-India trade agreement. RBI Governor Sanjay Malhotra believes that these current rates will likely remain for the foreseeable future.
Reflecting back to late 2025, there was a significant period of stability when the Reserve Bank of India kept the policy rate at 5.25%. This decision was supported by a solid growth forecast of 7.4% and controlled inflation. The USD/INR exchange rate behaved as expected, remaining in the 90-91 range for several weeks.
However, by February 2026, conditions changed. The latest inflation data for January showed a rise to 5.8%, slightly above market forecasts and close to the RBI’s upper tolerance limit. This increase, along with a strong manufacturing PMI of 57.5 in January, suggests the economy might be strengthening more than expected.
These domestic issues are worsened by a stronger US dollar on the global stage, following recent aggressive comments from the Federal Reserve. Additionally, India’s trade deficit widened in the latest data, adding pressure on the rupee. This week, the USD/INR spot rate has risen to 91.20, testing the upper end of the previously stable range.
Preparing for a Potential Breakout
With rising implied volatility, it seems wise to prepare for a potential breakout. We see value in purchasing near-term USD/INR call options, like those expiring in March 2026 with a strike price near 91.50. This strategy allows for potential gains while limiting risk to the premium paid.
The favorable environment of late last year, which favored selling options for premium income, seems to be diminishing. With the pair approaching key resistance levels and inflation on the rise, gearing up for a potential increase in currency movement is the wiser strategy. This differs from the low volatility that dominated the fourth quarter of 2025.
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