A 25-bps hike will not make a dent: Shriram Group chief economist Apoorva Javadekar on RBI’s rate dilemma

A 25-basis-point rate hike by the Reserve Bank of India (RBI) is unlikely to meaningfully support the rupee and may prove counterproductive if not backed by domestic inflation dynamics, according to Apoorva Javadekar, Chief Economist, Shriram Group. 

In an exclusive interview with Fortune India, Javadekar said the RBI should not respond to rising US yields or a narrowing interest-rate differential, given India’s sizeable foreign exchange reserves, and the risks that higher rates could pose to growth. 

"We do not think the RBI should or would respond to rising US yields or a narrowing yields differential. With FX Reserves at $785 billion, the RBI has ample ammunition to manage the INR (and at the same time drain liquidity from the banking system)," he said. 

RBI may have little room to raise rates 

Javadekar said Indian rates are already among the highest in the emerging-market universe, and a 25-bps increase "will not make a dent". He highlighted that the Indonesian rupiah, which continued to weaken despite a surprise rate hike at an unscheduled Bank of Indonesia meeting in May. 

"A rate hike, if not warranted by domestic inflation dynamics, risks choking growth impulses and widening fiscal deficits, feeding back into renewed currency weakness, making a rate hike self-defeating," he noted. 

Javadekar’s comments come after India’s August CPI inflation rose to 4.82%. However, he said the latest inflation reading does not necessarily strengthen the case for an RBI rate hike. "In our view, and contrary to popular commentary, the inflation-growth trade-off has worsened, significantly reducing the room for the RBI to raise rates," he said. 

Indian inflation remained below market expectations in August while only 5% of ex-food items rose by more than 1 percentage point year-on-year, compared with 6%-7% in May and June. At the same time, high-frequency indicators such as tractor sales and GST collections have weakened in recent months. 

"With worsening inflation-growth dynamics, our baseline is a pause for the upcoming October meeting," Javadekar said. 

Fed policy could weigh on bond flows 

The economist said the Indian debt market has historically experienced capital outflows during US Federal Reserve rate-hike cycles. In Q3 and Q4 2022, Indian debt lost around $580 million in capital flows when the Fed raised rates by 125 bps. 

The inclusion of Indian bonds in global indices subsequently brought $5-6 billion in debt inflows at the end of 2024 and the beginning of 2025, despite Indian yields being lower than US yields. However, with the index-inclusion effect largely played out, debt flows are now vulnerable to compressed yield spreads between India and the US. The spreads stand at 196 bps for two-year bonds and 207 bps for 10-year bonds, around 1.2σ below their five-year average, according to Javadekar. 

Indian bond yields have also become more sensitive to global financial conditions. Ten-year Indian yields have surged by 20 bps during a global bond sell-off despite an unprecedented liquidity surplus in the Indian financial system. "The US and Indian yields are at an 88% correlation on a 30-day rolling basis, much higher than the 60% average in the pre-index-inclusion period," he said. 

Oil prices above $100 a barrel adds to RBI’s growth-inflation challenge 

Crude oil prices above $100 a barrel could create a more difficult policy environment for the RBI, although the impact on inflation could be partly offset by weaker demand and lower corporate pricing power. 

"While inflation worsens due to second-round effects and a weaker currency, demand compression from inflation and reduced real disposable income also limits the corporate sector’s ability to charge higher prices, constraining some of the effect," he said. 

Sustained higher oil prices could trigger second-round effects on consumer prices while a weaker rupee—driven by a higher import bill, concerns over the fiscal deficit, and Fed rate hikes—may further increase imported inflation. However, weaker disposable income could slow domestic demand and limit companies’ ability to pass on higher costs. Higher crude prices could also constrain the government’s fiscal capacity, further weighing on growth and demand-led inflation. 

"On balance, elevated oil prices create a more difficult policy environment for the RBI with a sharp growth-inflation trade-off," Javadekar pointed out. 

7.8% GDP growth may not justify a rate hike 

India's stronger-than-expected 7.8% GDP growth in Q1FY27 could, on the face of it, give the RBI more room to prioritise inflation. But Javadekar said the growth print does not necessarily provide sufficient confidence to the Monetary Policy Committee (MPC) to raise rates. 

He said the MPC would focus on more recent high-frequency indicators, including worsening PMI and RBI consumer sentiment, a 4.2% month-on-month decline in GST collections, a slowdown in August tractor demand, and 15% deficient rainfall weighing on rural spending. 

Javadekar also noted that the 7.8% growth was driven by capital expenditure, making the economy more vulnerable to the cost-of-capital channel. "On balance, we do not think that the recent GDP print will provide enough confidence to the MPC on the growth front," he said. 

Gold likely to regain favour over the longer term 

Despite higher interest rates, Javadekar expects gold to remain supported over the medium to long term. He said growing fiscal debt, increased defence spending globally, and elevated oil prices amid worsening geopolitics could strengthen gold’s safe-haven appeal. 

"The same factors driving interest rates up (and gold down)—namely, growing fiscal debt amplified by enlarged defence spending around the world, and elevated oil prices on the back of worsened geopolitics—will drive gold higher in the medium to long run, on safe-haven appeal," he said. 

He also pointed to a structural shift in gold demand, with investment demand exceeding jewellery demand for the first time in 2025. Central banks, which are less sensitive to the interest-rate channel, continue to accumulate gold, with collective purchases of 289 tonnes in Q2 2026, he said while adding that Poland has reaffirmed its commitment to build 700 tonnes of gold reserves while China has added gold every month for the past two years.