Bond Yields Decline Following RBI's Efforts to Attract Foreign Investment: India's Bond Market Emerges as Potential Gainer

RBI Unveils Aggressive Measures to Attract Foreign Capital and Support Rupee

The Reserve Bank of India (RBI) has announced a series of measures aimed at strengthening foreign capital inflows as the economy grapples with elevated crude oil prices, foreign fund outflows, and a weakening rupee following the Iran war. Although the RBI's June monetary policy decision left the repo rate unchanged at 5.25%, the central bank's aggressive measures to attract foreign capital and support the rupee have captured the attention of bond market participants.

Measures to Attract Foreign Capital

The RBI has unveiled a package of measures designed to attract foreign capital and ease pressure on the rupee. These measures include scrapping capital gains tax for foreign investors in government bonds, removing the 20% tax on interest earned from such investments with effect from April 1, 2026, offering concessional forex swaps until September 30, and subsidizing hedging costs for overseas borrowing and foreign currency non-resident deposits. The RBI has also expanded the Fully Accessible Route (FAR) by including new issuances of 15-year, 30-year, and 40-year government securities.

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Impact on Bond Markets

Following the announcement, India's benchmark 10-year government bond yield eased slightly to 6.96%, while the rupee strengthened 0.35% to 95.48 against the US dollar. Equity markets also extended gains, with benchmark indices rising around 0.2%. Bond market experts believe that the policy stance is clearly supportive of bond markets, as well-capitalized banks and NBFCs stand to benefit from the targeted hedging subsidies and measures aimed at maintaining systemic stability.

Yield Outlook Hinges on Crude Oil and Inflation

Bond market participants highlight the importance of the RBI's forex and borrowing-related initiatives in shaping future yield movements. According to experts, the policy rate cuts over the past two years have not fully translated into lower borrowing costs for corporates and public sector undertakings because of strong credit demand and supply pressures in the domestic debt market. They expect the latest measures to encourage more overseas borrowing by PSUs, thereby reducing domestic bond supply and supporting lower yields.

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Inflation Outlook

Despite the supportive measures, some experts remain cautious about the inflation outlook. The RBI has revised GDP growth to 6.60% from 6.90% and CPI inflation to 5.1% versus 4.4% projected in the previous policy meeting. With CPI inflation revised higher, some experts expect a rate hike in the coming months.

Note: The RBI's monetary policy decision was largely in line with expectations, but the real significance lies in the package of measures designed to attract foreign capital and ease pressure on the rupee.