The Reserve Bank of India's recent monetary policy measures are being viewed as a coordinated effort to alter market perception of the rupee from depreciation concerns towards stronger capital inflows. According to SBI Research, these measures could trigger at least $40 billion in inflows, potentially supporting the rupee towards the 92-93 levels. Kotak Securities places the potential inflow impact even higher, at $50-75 billion. Both institutions expect the Monetary Policy Committee to maintain a pause in August, keeping the repo rate unchanged at 5.25% with a neutral stance, despite rising inflation pressures and lowered growth estimates.
Policy Review Details
In its latest policy review, the MPC unanimously maintained the repo rate at 5.25% and continued with a neutral policy stance. The RBI lowered its FY27 real GDP growth forecast by 30 basis points to 6.6%, citing weak global demand, supply chain disruptions, and El Nino-related risks. Growth for the third quarter was also revised down by 50 basis points to 6.5%. On the inflation front, the central bank raised its FY27 CPI inflation projection by 50 basis points to 5.1%. Quarterly projections were also revised, with Q3 inflation at 5.9% and Q4 at 5.4%. Core CPI inflation was increased by 30 basis points to 4.7%.
Market Perception and Rupee Support
SBI Research stated that the policy stance now reflects a stronger focus on inflation vigilance and external sector defense, alongside an effort to maintain stability and prevent speculative pressure on the rupee. The RBI also reiterated that currency movements can diverge from underlying fundamentals, rejecting expectations of a fall towards the 100 mark.
Measures to Encourage Capital Inflows
A key part of the package involves measures to encourage capital inflows. The RBI has expanded the Fully Accessible Route to include 15-, 30-, and 40-year government securities and removed the 30% short-maturity cap. With Rs 1.5 lakh crore of new long-tenor bonds yet to be issued and Rs 4.06 lakh crore of remaining headroom under the general route, SBI expects stronger participation from foreign portfolio investors, easing of long-end yields, and lower government borrowing costs. Tax exemptions on interest and capital gains for FPIs are also expected to add Rs 4,000-5,000 crore plus Rs 500-1,000 crore in benefits, strengthening prospects for global bond index inclusion. Kotak Securities also pointed to relaxed equity investment limits for NRIs, OCIs, and all PROIs without SEBI registration.
External Borrowing and Deposits
On external borrowing and deposits, the RBI will fully bear hedging costs at 2.5% annually for new 3-5 year FCNR(B) deposits until September 30, 2026, along with associated SLR and CRR costs. SBI expects banks to offer rates above 5.5%, drawing parallels with the $34 billion mobilisation seen in 2013. A concessional forex swap facility for 3-5 year PSU ECBs until September 30 is also expected to boost overseas borrowing by companies such as PFC, REC, and NTPC, especially after ECB/FCCB inflows dropped 30% in FY26 to $42.9 billion.
Export Proceeds Timeline
The RBI has also shortened the export proceeds realisation timeline to 9 months from 15 months, enabling quicker forex inflows.
Market Reaction
Financial markets reacted positively to the announcement. The rupee strengthened by 50 paise, while government securities across the 10-40 year segment saw yields decline by 4-5 basis points. Corporate bond yields in the 2-3 year segment fell by 20-25 basis points, and the OIS curve moved down by 10-15 basis points.
Interest Rate Outlook
On interest rates, SBI Research expects the RBI to look through inflation prints and maintain its pause in August, with growth considerations taking priority over tightening bias. Kotak Securities, however, anticipates around 50 basis points of rate increases in FY27, given inflation projections of 5.1%, although much of this has already been priced in by markets. Liquidity conditions remain in surplus at around Rs 1.39 lakh crore so far in June, supported by government cash balance drawdowns and seasonal currency return during the monsoon, which is expected to aid banking system liquidity in the near term.
