RBI's Inflation-Focused Measures May Inject Up to $75 Billion into India, Improving Rupee Outlook

RBI Keeps Interest Rates Unchanged, Unveils Measures to Attract Foreign Capital

The Reserve Bank of India (RBI) has opted to maintain the status quo on interest rates, leaving the repo rate unchanged at 5.25 percent in its latest policy package. However, the central bank's decision signals a two-pronged strategy to attract foreign capital to support the rupee and financial markets while retaining flexibility to combat inflation if price pressures intensify in the months ahead.

The Monetary Policy Committee (MPC), headed by RBI Governor Sanjay Malhotra, unanimously decided to maintain a neutral stance, reflecting growing uncertainty in the global economy. The decision is influenced by the impact of geopolitical tensions in West Asia and higher energy prices on inflation and growth. While rates remained on hold, the central bank unveiled a series of measures aimed at encouraging foreign currency inflows.

These measures include a concessional foreign exchange swap window for external commercial borrowings by public sector undertakings, support for foreign currency non-resident (FCNR-B) deposits, and broader access for overseas investors and non-resident Indians. According to a report by ICICI Bank Global Markets, these measures could attract nearly $50 billion in inflows. Analysts believe the steps will improve liquidity conditions, ease funding pressures on banks, and strengthen the rupee, which has faced depreciation pressures in recent months.

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Another significant development is the RBI's decision to expand the Fully Accessible Route (FAR), allowing foreign investors greater access to Indian government securities. Combined with recent government tax concessions on bond investments, the move is expected to strengthen India's case for inclusion in Bloomberg's global bond index. If that materialises, analysts estimate an additional USD 25 billion could flow into Indian debt markets.

Financial markets reacted favourably to the announcements. The rupee recovered from recent lows, while bond yields moved higher, particularly in the five-year segment, reflecting expectations of stronger foreign participation in the debt market.

Despite the optimism surrounding capital inflows, inflation remains a major concern. The RBI has revised its inflation outlook upward, projecting consumer price inflation at 5.1 percent for FY27. Inflation is expected to rise steadily through the year, reaching 5.9 percent in the third quarter before easing slightly.

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The central bank has simultaneously lowered its growth forecast for FY27 to 6.6 percent from 6.9 percent. The revision reflects concerns over elevated crude oil prices, supply disruptions linked to ongoing conflicts in West Asia, and weather-related risks associated with El Niño.

ICICI Bank Global Markets believes the current pause may not last indefinitely. The report expects cumulative rate increases of 50 to 75 basis points over the coming quarters if inflation continues to move away from the RBI's 4 percent target.

The banking sector broadly welcomed the RBI's approach. Bankers described the decision as a balanced response to an uncertain global environment, arguing that stable interest rates will provide predictability for borrowers while allowing policymakers time to assess evolving risks.

State Bank of India Chairman and Indian Banks' Association chief CS Setty said measures aimed at attracting foreign capital were "timely and comprehensive" and would help strengthen liquidity, deepen bond markets, and support the rupee.

Indian Overseas Bank Managing Director and CEO Ajay Kumar Srivastava said a cautious approach was appropriate given geopolitical tensions and elevated energy prices. Keeping rates steady, he argued, would support economic recovery while ensuring stability in borrowing costs for households and businesses.

Similar views were echoed by Karur Vysya Bank Managing Director and CEO Ramesh Babu, who said the pause provides a predictable environment while preserving flexibility to respond to changing global conditions.

Foreign banks also welcomed the measures. PD Singh described the proposal to attract medium-term foreign currency deposits as a potential "game changer" that could boost foreign currency inflows while helping banks strengthen their deposit base.

For now, the RBI appears to be betting that stronger capital inflows, improved liquidity, and resilient economic growth will help cushion the economy against external shocks. However, with inflation expected to rise and oil prices remaining volatile, markets increasingly believe the central bank's next major move could eventually be a rate hike rather than a cut.