Rupee outlook: SBI Research calls for rate hikes, tighter overseas outflow checks

The Reserve Bank of India (RBI) and the government may need a coordinated policy response to address currency pressures and volatile global financial markets, according to SBI Research’s Ecowrap report dated October 15.

The report recommends calibrated monetary tightening, a review of non-essential overseas remittances under the Liberalised Remittance Scheme (LRS), closer scrutiny of overseas direct investment (ODI) and a time-bound artificial intelligence (AI) policy framework to attract capital.

SBI Research says the rupee could retain an appreciating bias, but warns that external uncertainties remain significant. It argues that lasting currency stability will require structural reforms alongside central bank intervention.

Changes to RBI’s rate corridor

The report suggests raising the marginal standing facility (MSF) rate by 50 basis points, from 5.75% to 6.25%, followed by a 25-basis-point repo rate increase in December to 5.75%. It also proposes taking the MSF rate to 6.50%.

According to SBI Research, this approach could tighten overnight liquidity and push up short-term money-market rates while limiting the immediate increase in the benchmark repo rate.

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The report estimates that inflation could peak at around 6.8% in November 2026, potentially pointing to a peak repo rate of approximately 6% under the historical relationship it examines.

These are research estimates and recommendations, not confirmed RBI decisions.

Market uncertainty

SBI Research says the US 10-year Treasury yield crossed 5.32% intraday on October 14 before retreating to around 5.19%, amid expectations of further US monetary tightening.

India’s 10-year government securities yield had risen to around 7.38%, according to the report. SBI Research credits the RBI and the government with managing domestic yields, while estimating that the Indian yield could eventually touch 7.6%.

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The report puts the average India-US 10-year government bond yield spread over the past 25 years at 408 basis points, compared with approximately 220 basis points at the time of publication.

It warns that global bond-market volatility and geopolitical uncertainty could continue to influence capital flows.

LRS outflows warrant closer scrutiny

The report calls for reviewing non-essential overseas remittances to conserve foreign exchange.

According to SBI Research, general-purpose travel expenditure reached $665.8 million in July 2026, compared with $148.5 million for studies abroad. In June, the corresponding figures were $488.3 million and $96.8 million.

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For the five months up to July, studies-abroad expenditure stood at $2.47 billion, against $6.36 billion under travel.

SBI Research argues that these trends justify reviewing non-essential outflows. The recommendation concerns reducing avoidable foreign-exchange expenditure, not automatically restricting all legitimate overseas payments.

ODI outflows rise sharply

The report also flags the increase in overseas direct investment. Combined ODI debt and equity outflows, it says, rose to $27.2 billion in FY25 and $27.8 billion in FY26, compared with $13.4 billion and $13.7 billion in the preceding two financial years.

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SBI Research recommends closer scrutiny of these flows, arguing that persistent capital-account deficits represent a structural concern for India’s balance of payments.

It says currency defence must address vulnerabilities in both the capital and current accounts.

AI policy clarity

SBI Research also calls for a credible, time-bound AI policy roadmap covering data governance, accountability, compliance and infrastructure.

The report argues that predictable regulation, reliable power, computing capacity and skilled labour could help India attract AI-linked investment and capture a larger share of the sector’s value creation.

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Its central message is that monetary tightening alone cannot guarantee lasting rupee stability. A combination of prudent RBI action, oversight of overseas outflows and reforms that encourage capital inflows could improve resilience to external shocks.