RBI Cautious as Rupee Weakness Pressures Rate Cut Outlook

India's rupee continued its downward trend this week, complicating the Reserve Bank of India's (RBI) plans to cut interest rates amid a challenging global economic landscape. The weakening currency, driven by concerns over inflation and external imbalances, has prompted central bankers to tread carefully as they evaluate the next steps in monetary policy. Markets are closely watching the RBI's upcoming rate decision, which is set for December 5.

Global markets also experienced a mixed start to the month, with major indices falling after a brief respite. The Dow Jones, S&P 500, and Nasdaq all ended Monday in the red, snapping a five-day winning streak. The selloff was exacerbated by a sharp decline in cryptocurrencies, including Bitcoin, which fell nearly 6%.

Meanwhile, the Indian economy's current account deficit (CAD) moderated to $12.3 billion in the second quarter of the fiscal year 2025-26, a significant improvement from the previous year. This reduction offers some relief as the RBI weighs the balance between growth and inflation control.

Why the Standoff Happened

The RBI faces a delicate balancing act as it prepares its monetary policy. A weaker rupee increases import costs and inflationary pressures, which could undermine the benefits of rate cuts. At the same time, the Indian economy is expanding at a robust pace, with growth reaching 8.2% in the third quarter of the fiscal year. This performance has raised expectations that the RBI might consider easing policy to support further growth.

The global context adds complexity. OPEC+ has decided to maintain its current oil production levels for the first quarter of 2026, signaling a cautious approach amid fears of a potential supply glut. This decision may impact global crude prices, which could influence India's import costs and inflation trajectory. With Brent crude closing near $63 a barrel, the market outlook remains uncertain.

How Markets Reacted

Indian equity markets have remained resilient, with the BSE Sensex and Nifty indexes hitting record highs last week. However, the performance has been driven by strong momentum in key sectors such as automobiles and services. The release of November automobile sales data on December 1 is expected to offer further clarity on domestic demand. Pravesh Gour, a senior technical analyst, emphasized the importance of the November automobile sales data in gauging festive demand and consumption trends.

The recent global market movements have also had a bearing on Indian equities. As the U.S. market grapples with volatility and the Federal Reserve's evolving rate path, investors are closely monitoring how these developments might influence global capital flows. The Bank of Japan's recent hints at a rate hike added to the uncertainty, weighing on sentiment.

In the U.S., the Dow fell by 427 points on Monday, breaking a five-day winning streak, while Bitcoin continued to struggle to regain the $90,000 level. The selloff in crypto had a spillover effect on tech stocks, with some AI-related names like Broadcom and Super Micro Computer seeing declines. The selloff in crypto had a spillover effect on tech stocks.

What Analysts Are Watching

Analysts are keeping a close eye on several indicators as they assess the likelihood of an RBI rate cut. The December 5 monetary policy decision will be pivotal, with the central bank's commentary on inflation and growth expected to guide market expectations. The Indian economy's performance in the first half of the fiscal year 2025-26 has been encouraging. The current account deficit for the period has declined to 0.8% of GDP, and net FDI inflows have increased significantly. However, foreign portfolio investment has seen a net outflow, indicating some hesitancy among foreign investors.

On the real estate front, Embassy REIT's acquisition of a Bengaluru office space for ₹852 crore has been seen as a strategic move to expand its high-quality Grade-A assets in a key growth city. The deal is expected to be accretive to the REIT's distribution per unit and net operating income. The acquisition of a Bengaluru office for ₹852 crore has been seen as a strategic move.

What This Means for Investors

The coming week will be critical for investors, with the RBI's rate decision, global macroeconomic data, and FPI flows all set to influence market sentiment. While the Indian economy shows signs of strength, external headwinds such as the weak rupee and global volatility could temper gains.

The internationalization of the yuan has also added another layer of complexity. With countries like Russia and Kazakhstan increasingly turning to yuan-denominated bonds, the global trade landscape is evolving. This trend is driven by market demand rather than a push from China, reflecting a broader shift in economic dynamics.

For Indian investors, the focus will remain on balancing domestic economic fundamentals with global macroeconomic trends. With the markets at elevated levels, any policy action by the RBI or developments in global oil and capital markets could trigger significant volatility. Investors are advised to remain cautious and monitor key indicators as the year draws to a close.