RBI Keeps Repo Rate Unchanged Amid Global Uncertainty, Attracts Foreign Capital
The Reserve Bank of India (RBI) has left interest rates unchanged, despite raising its inflation forecast and lowering its growth outlook, as policymakers grapple with pressure on the rupee and heightened global uncertainty.
RBI Keeps Repo Rate Unchanged Amid Global Uncertainty
The six-member monetary policy committee (MPC) kept the repo rate unchanged at 5.25%, citing geopolitical risks, supply-chain disruptions, and weather-related uncertainties.
The RBI’s decision comes as the rupee has weakened 3.7% against the US dollar since the US-Iran war began on 28 February, according to Bloomberg data. It closed at 94.94 against the dollar on Thursday.
Key Measures to Attract Foreign Capital
Alongside the policy decision, the RBI, in a coordinated move with the Centre, widened overseas investors’ access to government securities, eased investment restrictions for foreign portfolio investors (FPIs), and backed tax exemptions on sovereign bond investments.
Experts expect inflows of $35-45 billion as a result of the measures, with the RBI governor Sanjay Malhotra stating that the central bank does not have a target amount but expects “healthy flows” from external commercial borrowings and other measures.
Market Impact and Details
- The RBI expanded the universe of securities eligible under the fully accessible route (FAR) to include all new issuances of 15-year, 30-year, and 40-year government securities.
- The government also made sovereign green bonds eligible under the FAR framework.
- Data from National Securities Depository Ltd (NSDL) showed net investments by foreign portfolio investors in FAR securities of $653 million so far in FY27.
The bond yields eased after the announcements, with the yield on the 10-year benchmark government bond ending at 6.97% on Friday compared to 6.99% on Thursday.
Market participants expect the move to support the government’s borrowing programme by increasing demand for longer-tenor bonds, improving market liquidity, and potentially lowering borrowing costs.
Key Takeaways
- The RBI kept the repo rate unchanged at 5.25% despite raising its inflation forecast and lowering its growth outlook.
- The central bank expects inflows of $35-45 billion as a result of the measures to attract foreign capital.
- The RBI expanded the universe of securities eligible under the fully accessible route (FAR) to include all new issuances of 15-year, 30-year, and 40-year government securities.
FAQs
What are the key measures announced by the RBI to attract foreign capital?
The RBI has widened overseas investors’ access to government securities, eased investment restrictions for foreign portfolio investors (FPIs), and backed tax exemptions on sovereign bond investments.
What is the expected impact of the RBI’s measures on the rupee?
The RBI’s measures are expected to ease pressure on the rupee over the medium to longer term, with the tax exemption potentially raising FPI returns on Indian government bonds by 15-20%.
What is the current growth outlook for the Indian economy?
The RBI has downgraded the growth outlook, expecting the Indian economy to grow 6.6% in FY27, from 6.9% earlier, due to prolonged supply chain disruptions, heightened volatility in global financial markets, and weather-related shocks.
Conclusion
The RBI’s decision to keep interest rates unchanged and announce measures to attract foreign capital is a significant step towards addressing the pressure on the rupee and global uncertainty.
The central bank’s measures are expected to support the government’s borrowing programme, improve market liquidity, and potentially lower borrowing costs.
As the RBI continues to navigate the challenges of global uncertainty and domestic economic growth, investors and policymakers will be closely watching the impact of these measures on the Indian economy.
With the RBI’s measures in place, the Indian economy is expected to attract healthy foreign flows, supporting its growth and stability in the coming months.
