Rupee hits record 94.92 vs dollar, RBI faces rate hike call

The rupee closed Thursday at 94.92 against the dollar, the weakest it has ever been. It is now inching toward 100, a number that until last year sat firmly worst-case scenarios. For anyone with an EMI, a fixed deposit, or plans to send a child abroad, that single number is about to start mattering a lot more.

According to a report in Mathrubhumi, the Reserve Bank of India is now staring down a choice it has spent eighteen months trying to avoid. Either it lets the rupee keep sliding, or it raises interest rates to defend it. Neither path is comfortable. Both will be felt in millions of household budgets.

This is what changed. Two months ago, fighting in Iran broke out in earnest, and the Hormuz Strait, the narrow waterway that carries roughly a fifth of the world’s oil, became a chokepoint. Crude prices climbed. India, which imports the bulk of its oil, suddenly had a much bigger dollar bill to pay every month. Asian currencies took the hit together. The Thai baht, the Philippine peso, and the Indonesian rupiah all weakened alongside the rupee.

Foreign investors did what they tend to do in moments like this. They pulled their money out. Indian equity markets have lost about 26 billion dollars in foreign outflows over the past year, Mathrubhumi reports, and 20 billion of that has left since January alone. Every dollar that exits has to be bought, and that buying pressure is what is dragging the rupee down day after day.

Now, the RBI’s stance until very recently was a comfortable one. Sanjay Malhotra took over as governor in December 2024 and pursued what economists call easy-money policy. In simple language, that means cheap loans and plenty of cash floating around in the banking system. The central bank cut its main interest rate by a full 1.25 percentage points and pumped about 20 lakh crore rupees of liquidity into the banks. The thinking was straightforward: keep credit cheap, keep growth ticking, let households and businesses spend.

That logic worked while the rupee was stable and inflation was tame. In March, inflation came in at 3.4 percent, comfortably inside the RBI’s target band. But a weakening currency turns the equation upside down. When the rupee falls, every barrel of imported crude, every shipment of edible oil, every imported electronics component costs more in rupees. That cost works its way to the petrol pump, to the kitchen, to the retail shelf. Inflation that looked controlled in March will not look that way for long.

Here is where the household angle gets sharp. The government has so far been holding state-run oil companies back from raising fuel prices. That is a political cushion, not an economic one. The cooking gas cylinder has already gone up by 993 rupees in recent revisions. Anyone who tracks their monthly grocery bill knows what a number like that does to the rest of the budget. Cushions of this kind do not last forever. Eventually the dam breaks, or the central bank has to step in another way.

The other way is the one the RBI does not want to take. A rate hike. If the central bank raises interest rates, two things happen at once. Foreign money finds Indian deposits and bonds more attractive again, which slows the dollar bleed. And domestic borrowing becomes more expensive, which cools demand and takes some pressure off prices. The trade-off is harsh. Higher rates mean higher home loan EMIs, higher car loan rates, costlier working capital for small businesses. A young family that just stretched to buy a flat will feel the pinch within months.

This is exactly why the finance ministry is reportedly nervous about a hike. According to Mathrubhumi, the worry inside the government is that raising rates will throttle consumption at a moment when the broader economy is already absorbing the shock of the war and the oil disruption. Slow consumption means slower hiring, weaker tax receipts, and a tougher year for the small-business owner in tier-2 cities who took out a loan last March on the assumption that money would stay cheap.

The banking sector is the part of this story most readers do not see, but it is where the real risk sits. Credit growth was running at 14.5 percent before the fuel crisis, a healthy number that suggested the economy had appetite. If rates climb, fewer people will take loans. Big private banks have the cushion to ride this out. Public-sector banks may not. They are the ones that have lent heavily to the MSME segment, the small and medium enterprises that employ a huge share of urban India. More than a quarter of the bad loans on PSU bank books already trace back to this sector. A rate squeeze will put more of those loans under stress.

The RBI has also told banks to set aside extra capital in advance, against future loan losses. That sounds like prudent risk management, and it is. But for a bank already managing thin margins, it means less money available to lend, just at the moment when the wider economy needs credit to keep flowing.

So what should an ordinary reader take from all this? Three things, broadly. The era of falling EMIs is probably ending, and anyone planning a big-ticket purchase should factor in higher loan costs over the next year. Imported goods, from electronics to certain food oils, will get more expensive even before inflation officially picks up. And savers who have been frustrated by low fixed-deposit rates may finally start to see more attractive returns, though that will be cold comfort if the rest of the budget is climbing faster.

The RBI’s next move is not yet locked in. Governor Malhotra has built his reputation on patience. But patience has a limit, and the rupee is testing it. The choice now is between a difficult correction taken in time, and a much harder one taken too late. The household budget, sitting between the two, will feel whichever one arrives.