MUMBAI: The Reserve Bank of India held its benchmark interest rate steady on Friday and unveiled steps to help defend the embattled rupee, as the economy grapples with costly oil and foreign investor outflows in the wake of the Iran war.
The measures, which include scrapping capital gains tax for foreign holders of government bonds and sweetening dollar deposit schemes for non-resident Indians, amount to a calibrated bet that currency stability can be shored up without sacrificing growth, which held strong in the last financial year but is seen sliding due to higher oil prices, supply disruptions and poor rains.
The RBI’s rate panel voted unanimously to keep the policy repo rate unchanged at 5.25%, a decision predicted by nearly 80% of 56 economists polled by Reuters.
The monetary policy committee also stuck to its “neutral” stance.
“Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge,” RBI Governor Sanjay Malhotra said, adding the central bank will remain “data dependent”.
While underlying inflation pressures remain benign, second-round effects warrant vigil, he said.
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India’s benchmark 10-year bond yield fell to 6.95%, while the rupee strengthened 0.6% to 95.24, after the RBI’s steps to attract dollar inflows. The benchmark equity indexes turned lower and were down 0.2%.
A war-driven surge in crude prices and record foreign fund outflows have pushed the rupee down nearly 5% to historic lows since the Gulf conflict erupted late in February, fuelling calls from some analysts for higher rates to defend the currency.
Across the region, policymakers are already moving to shore up their currencies. Indonesia, the Philippines and Sri Lanka have raised interest rates in recent weeks, while South Korea has held fire but signalled a turn is imminent.
Steps to support Indian rupee
The RBI held rates steady to avoid further pressure on growth, while policymakers moved separately to support the rupee. The government, alongside the RBI’s announcement, said it will scrap capital gains tax for foreign investors and remove the 20% tax on interest earned from such investments, effective from April 1, 2026.
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Foreign investors are subject to a 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months.
Separately, the RBI said it will offer concessional forex swaps until September 30 to encourage state-owned firms to tap dollar borrowings.
It will also compensate banks for hedging costs on 3-year and 5-year foreign currency non-resident deposits aimed at the Indian diaspora.
The RBI set no dollar-inflow target but expects “healthy” inflows from the measures, Malhotra said, adding curbs on capital outflows are not under discussion.
Taken together, the measures could draw in $40 billion to $60 billion, said Sachchidanand Shukla, group chief economist at Larsen & Toubro.
The rupee has slid 5% this year after a similar drop in 2025. Economists warn higher oil prices and capital outflows could widen India’s balance of payments deficit to about $65 billion this fiscal year.
Higher inflation, lower growth
The central bank’s updated forecasts point to a trickier macro outlook.
Retail inflation is now seen averaging 5.1% this fiscal year, up from 4.6% earlier, with core inflation nudged to 4.7% from 4.4%.
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Retail inflation in India remains below the 4% target and is projected to stay within the central bank’s tolerance band of 2-6% in the current fiscal year, preserving room to hold rates. GDP growth by contrast, has been shaved and is expected at 6.6% this fiscal year, below the 6.9% forecast in April. In the fiscal year that ended in March, India’s economy grew a stronger-than-expected 7.7%, helped by the farming and construction sectors.
Global headwinds are clouding the growth-inflation outlook, but the economy remains “relatively strong,” Malhotra said.
Most economists now expect rate hikes in the second half of the year.
“The RBI’s revised growth and inflation forecasts, along with its guarded guidance, suggest it is preparing markets for a possible policy pivot as early as August,” said Krishna Bhimavarapu, Asia Pacific economist at State Street Investment Management.
