RBI leaves rates unchanged, shifts focus to attracting foreign capital

Mumbai/New Delhi: Even as India’s central bank paused interest rates despite raising its inflation forecast and lowering its growth outlook, it rolled out a sweeping package of measures to attract foreign capital as policymakers grapple with pressure on the rupee and heightened 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.

Alongside the policy decision, the Reserve Bank of India (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.

Among key steps announced on Friday, 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.

Introduced in 2020, FAR is a separate channel allowing non-residents to invest in specified Indian government securities without investment ceilings. 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 number stood at $1.7 billion in FY26 and $9.4 billion in FY25.

“We are not targeting any particular amount, but we do expect healthy flows, both from ECBs (external commercial borrowings) and various other measures that have been announced. As a result of all these measures, we expect healthy flows,” RBI governor Sanjay Malhotra said on Friday at a media briefing.

Meanwhile, the government on Friday exempted overseas investors from income tax on interest income and capital gains arising from investments in government securities. The exemption, effective 1 April 2026, will apply to all interest and capital gains earned by FPIs on G-Sec investments from that date onwards.

“This policy was more about addressing the paucity of foreign flows into the Indian economy and addressing the external sector problems, rather than addressing the growth-inflation dynamics,” said Indranil Pan, chief economist, Yes Bank.

The central bank has come under pressure in recent months after the rupee’s sharp slide against the US dollar, fuelling speculation that policymakers could consider a rate hike to support the currency.

Since the US-Iran war began on 28 February, the rupee has weakened 3.7%, according to Bloomberg data. It closed at 94.94 against the dollar on Thursday.

The tax exemption could raise FPI returns on Indian government bonds by 15-20%, making India more attractive to foreign investors and strengthening the case for global bond index participation, said Rajesh H. Gandhi, partner at Deloitte India. “The move should ease pressure on the rupee over the medium to longer term.”

The bond yields eased after the announcements. Yield on the 10-year benchmark government bond ended at 6.97% on Friday compared to 6.99% on Thursday. The 10-year yield can see a further fall of 5 basis points, Rajeev Pawar, treasury head at Ujjivan Small Finance Bank, said.

Market participants cheered the move to allow access to more securities under the FAR route and expect it to support the government’s borrowing programme by increasing demand for longer-tenor bonds, improving market liquidity and potentially lowering borrowing costs.

“The 10-year benchmark yield is likely to find support around 6.9% and could move towards 7.1% as markets reassess the policy outlook closer to the next MPC meeting,” VRC Reddy, treasury head at Karur Vysya Bank said.

Equity investment reforms

The government and RBI also eased rules governing foreign investment in Indian equities. Individual Persons Resident Outside India (PROIs) will now be allowed to invest in listed Indian equities through the Portfolio Investment Scheme (PIS), a facility previously available only to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).

The government has also increased the investment cap for an individual PROI under the scheme to 10% of a company’s paid-up capital from the existing 5%, while the aggregate limit for all such investors has been raised to 24% from 10%.

Foreign investors have sold $14 billion in Indian equities on a net basis so far in FY27. So far this financial year, FPIs have been net sellers of $902 million in the general debt route and $213 million in the voluntary retention route (VRR), but net buyers of $653 million in the passive fully accessible route (FAR), as per NSDL data. Inflows through the last route are a result of Indian debt being included in Bloomberg and JP Morgan indices.

Policy pause

On the monetary policy front, faced with uncertainties around the duration of the West Asia conflict and forecasts of sub-par monsoon, the central bank decided to wait till there is more clarity before taking a call on interest rates.

The MPC kept the key repo rate unchanged at 5.25%, while acknowledging that there were considerable risks to its assessments of inflation and growth. These emanate from the inability to predict how long the conflict will last and how intense it will be, the magnitude of its spillover effects, and how quickly supply chains that have been disrupted can be restored.

The committee downgraded the growth outlook, while raising the inflation projections. The central bank now expects the Indian economy to grow 6.6% in FY27 (from 6.9% earlier), but cautioned that prolonged supply chain disruptions, heightened volatility in global financial markets, and weather-related shocks will pose downside risks to the outlook.

Retail inflation measured on the consumer price index is now forecast to be 5.1% in FY27, from 4.6% earlier.