The decision reflects a balancing act between supporting growth and preventing further currency weakness, even as economists warn that inflation risks are creeping higher and external pressures are intensifying.
At its latest meeting, the central bank’s monetary policy committee unanimously voted to maintain the repo rate at 5.25%, a move widely anticipated by markets. Nearly 80% of economists surveyed by Reuters had expected no change. The committee also retained its “neutral” policy stance.
“Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge,” said RBI Governor Sanjay Malhotra, stressing that policy decisions will remain “data dependent.” He added that while underlying inflation remains contained, “second-round effects warrant vigil.”
Policy Pause Amid Currency Strain
The RBI’s steady stance comes at a time when the rupee has been under sustained pressure, having fallen nearly 5% since late February and touching historic lows as crude oil prices surged and foreign capital flowed out of emerging markets.
After the policy announcement and accompanying measures, the rupee strengthened 0.6% to 95.24 per US dollar, while India’s 10-year bond yield slipped to 6.95%. Equity markets, however, turned lower, with benchmark indices down about 0.2%.
The currency’s weakness has been driven by a combination of higher import costs—particularly oil—and portfolio outflows, raising concerns about India’s external stability. Some analysts have argued for higher interest rates to defend the currency, but the RBI has opted instead for targeted liquidity and inflow incentives.
Across Asia, central banks have been responding differently to similar pressures. Indonesia, the Philippines, and Sri Lanka have recently raised rates, while South Korea has signalled that tightening may soon follow.
A Coordinated Push to Attract Dollar Inflows
Rather than tightening monetary policy, India has leaned on fiscal and regulatory measures to attract foreign capital.
In a parallel announcement with the RBI’s decision, the government said it would remove capital gains tax on foreign investors holding government bonds and eliminate a 20% tax on interest income from such investments, effective April 1, 2026.
Foreign investors currently face a 12.5% long-term capital gains tax on listed shares and bonds held for over a year.
The RBI also introduced additional incentives, including concessional forex swap arrangements for state-owned enterprises until September 30, aimed at encouraging dollar borrowing. It further pledged to offset hedging costs for banks offering 3-year and 5-year foreign currency deposits to non-resident Indians.
Governor Malhotra emphasised that no explicit inflow target had been set, but described expected inflows as “healthy,” while ruling out capital controls. “We are not discussing curbs on capital outflows,” he said.
Market estimates suggest the combined measures could attract between $40 billion and $60 billion, according to Sachchidanand Shukla, group chief economist at Larsen & Toubro.
Inflation Outlook Edges Higher, Growth Moderates
Despite the policy support for the rupee, the macroeconomic outlook has become more complex.
The RBI raised its inflation projection for the fiscal year to 5.1%, up from 4.6% previously, with core inflation also nudged higher to 4.7%. Even so, inflation remains within the central bank’s 2–6% tolerance band and below its 4% target, giving policymakers room to maintain current rates.
Growth, however, has been revised downward. India’s GDP is now expected to expand by 6.6%, compared to an earlier forecast of 6.9%. This follows a stronger-than-expected 7.7% expansion in the previous fiscal year, driven by agriculture and construction.
Malhotra acknowledged the mixed outlook, noting that while global conditions are challenging, the economy remains “relatively strong.”
Still, economists expect the current pause may not last indefinitely. Many now anticipate possible rate increases in the second half of the year if inflation and currency pressures persist.
“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.
Markets Watch for Next Move as External Pressures Build
The central bank’s approach signals a cautious preference for stability over aggressive tightening, even as global shocks continue to ripple through India’s economy. With oil prices elevated and capital flows volatile, policymakers are relying on a mix of tax incentives, liquidity tools, and targeted dollar inflows to steady the rupee without derailing growth.
For now, markets are left parsing a delicate message: rates are unchanged, but the direction of policy may not remain so for long.