RBI Policies Fail to Inspire Market Gains Despite Expected Boost

Market Reaction to RBI Measures Reflects Uncertainty Over Oil Prices and Monsoon

The Indian stock market's relatively muted response to the recent RBI measures indicates that investors are not yet ready to celebrate, despite the central bank's efforts to ease access to government bonds and address long-pending tax irritants.

The RBI's decision to open a concessional swap window for public-sector external commercial borrowings (ECBs) and announce a similar facility for banks mobilising 3-5 year FCNR(B) deposits, along with the government's tax benefits on sovereign debt, could potentially attract $30-40 billion of foreign currency inflows over the coming months. These measures are expected to stem rupee weakness and create buffers for the economy.

However, the market's reaction suggests that investors are still cautious due to concerns over oil prices and the potential impact of an El Niño-related weather disruption. The RBI's revised growth and inflation forecasts, which assume an implicit crude price of around $95 per barrel, are manageable but may not be sustainable if oil prices continue to climb.

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The RBI's decision not to overreact to the challenging external environment is seen as reassuring, with the central bank maintaining its growth forecast of 6.6% for FY27. However, the market's fate now lies with Brent oil prices and the monsoon, as the RBI has done its bit to ease access to government bonds and the government has addressed long-pending tax issues.

The RBI's decision to open the Fully Accessible Route to all new issuances of 15-year, 30-year and 40-year government securities, remove limits on individual securities under the FPI general route, and address the issue of withholding tax on government bonds are seen as positive steps. However, the arithmetic still does not favour India, with benchmark Indian government bond yields at around 6.2%-6.3% compared to US Treasury yields of around 4.5%.

Unless an investor has a strongly positive view on the rupee, many may still prefer to stay on the sidelines, given the negative carry of more than 1% after accounting for hedging costs. The RBI remains comfortable on growth, but the market's fate now lies with Brent oil prices and the monsoon, as the RBI has done its bit to ease access to government bonds and the government has addressed long-pending tax issues.

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