The monetary policy measures taken by the Reserve Bank of India are a concerted attempt to shift market perception of the rupee from concerns about currency depreciation to stronger capital inflows.
SBI Research estimates that these measures could lead to inflows worth at least $40 billion, which could support the rupee towards 92-93 levels. Meanwhile, Kotak Securities estimates that the potential inflow impact is higher, at between $50 and $75 billion.They both expect the Monetary Policy Committee (MPC) to remain unchanged in August, keeping the repo rate unchanged at 5.25% with a neutral stance, even as inflation pressures increase and growth estimates are revised downward.
In the latest policy review, the MPC unanimously maintained the repo rate at 5.25% and continued to follow a neutral policy stance. The Reserve Bank of India lowered its real GDP growth forecast for fiscal year 2027 by 30 basis points to 6.6%, citing weak global demand, supply chain disruptions and risks associated with the El Niño phenomenon.
The growth rate for the third quarter was also revised down by 50 basis points to 6.5%.
On the inflation front, the central bank raised its consumer price index inflation forecast for fiscal year 2027 by 50 basis points to 5.1%.
Quarterly expectations were also revised, with the inflation rate in the third quarter reaching 5.9% and 5.4% in the fourth quarter. Core CPI inflation rose by 30 basis points to 4.7%.The policy stance now reflects a stronger focus on “inflation vigilance and external sector defense”, coupled with efforts to maintain stability and prevent speculative pressure on the rupee, SBI Research said. The RBI also stressed that currency movements could differ from underlying fundamentals, rejecting expectations of a decline towards the 100 mark.A key part of the package includes measures to encourage capital inflows. The Reserve Bank of India has expanded the fully accessible route to include government securities with maturities of 15, 30 and 40 years, and removed the short maturity cap of 30%. With Rs 1.5 lakh crore of fresh long-term bonds yet to be issued and Rs 4.06 lakh lakh crore of headroom remaining under the pipeline, SBI expects stronger participation from foreign portfolio investors, cushioning in long-term yields and lower government borrowing costs.
Tax holidays on interest and capital gains for foreign financial institutions are also expected to add Rs 4,000-5,000 crore plus Rs 500-1,000 crore in interest, boosting the prospects of global bond index inclusion. Kotak Securities also noted relaxation in equity investment limits for NRIs, OCIs and all PROIs without SEBI registration.On external borrowing and deposits, the RBI will bear the entire hedging costs at 2.5% per annum on new FCNR(B) deposits for 3-5 years up to September 30, 2026, along with associated SLR and CRR costs.
The RBI expects banks to offer interest rates above 5.5%, matching the $34 billion mobilization seen in 2013. The soft 3-5-year foreign exchange swap facility of PSU ECBs until September 30 is also expected to boost external borrowing by companies like PFC, REC and NTPC, especially after ECB/FCCB flows fell by 30% in FY26 to $42.9 billion.These steps provide support to domestic capital markets and improve financing visibility for Indian companies abroad, Kotak Securities said.
The Reserve Bank of India has also shortened the timeline for realization of export earnings to 9 months from 15 months, enabling faster inflows of foreign exchange.Financial markets reacted positively to this announcement. The rupee appreciated by 50 paise, while government securities across the 10-40 year segment saw yields fall by 4-5 basis points. Corporate bond yields in the 2-3 year sector fell by 20-25 basis points, and the OIS curve fell by 10-15 basis points.On interest rates, SBI Research expects the RBI to “look at the inflation print” and maintain its pause in August, prioritizing growth considerations over tightening bias. However, Kotak Securities expects interest rate increases of around 50 basis points in FY2027, given 5.1% inflation expectations, although markets have already priced in most of that amount. Liquidity conditions remain in surplus at around Rs 1.39 lakh crore so far in June, supported by government cash withdrawals and seasonal currency return during the monsoon, which are expected to help banking system liquidity in the near term.
