RBI keeps rates unchanged, announces steps to boost rupee

The Reserve Bank of India (RBI) kept its key policy rate unchanged on Friday and announced a series of measures aimed at supporting the rupee, as policymakers balance inflation risks, rising oil prices and capital outflows linked to the Iran war.

The RBI’s Monetary Policy Committee unanimously voted to keep the policy repo rate unchanged at 5.25%, a decision that had been anticipated by nearly 80 per cent of the 56 economists surveyed by Reuters. The committee also retained its “neutral” policy stance.

Alongside the rate decision, the central bank and the government unveiled measures designed to attract dollar inflows and ease pressure on the rupee, which has fallen sharply since the Gulf conflict escalated in late February.

“The central bank’s rate panel noted that the global environment has deteriorated,” RBI Governor Sanjay Malhotra said while announcing the policy decision. The panel felt it was “prudent” to wait until greater clarity emerges, he said.

While inflation is expected to rise, underlying price pressures remain benign, Malhotra said. Second-round effects of the price pressure warrant vigil, he added.

Rupee Support Measures Announced

The RBI opted to keep rates steady to avoid additional pressure on economic growth while introducing separate measures to strengthen the rupee.

The government announced that it will scrap capital gains tax for foreign investors holding government bonds and remove the 20 per cent tax on interest earned from such investments, effective from April 1, 2026.

Foreign investors are currently subject to a 12.5 per cent long-term capital gains tax on listed shares and bonds held for more than 12 months.

Separately, the RBI said it will offer concessional foreign exchange swaps until September 30 to encourage state-owned companies to raise funds through dollar borrowings.

The central bank will also compensate banks for hedging costs on three-year and five-year foreign currency non-resident deposits targeted at the Indian diaspora.

Taken together, the measures could attract between $40 billion and $60 billion in inflows, according to Sachchidanand Shukla, Group Chief Economist at Larsen & Toubro.

The rupee has declined 5 per cent this year after a similar fall in 2025. Economists have warned that higher oil prices and continued capital outflows could widen India’s balance of payments deficit to around $65 billion during the current fiscal year.

A surge in crude oil prices following the war and record foreign fund outflows have pushed the rupee down nearly 5 per cent to historic lows since the conflict began, leading some analysts to call for higher interest rates to defend the currency.

Several regional central banks have already moved to support their currencies. Indonesia, the Philippines and Sri Lanka have raised interest rates in recent weeks, while South Korea has kept rates unchanged but indicated that a shift could be approaching.

Inflation Forecast Raised, Growth Outlook Cut

The RBI revised its projections for the current financial year, raising its inflation forecast and lowering its growth estimate.

Average retail inflation is now expected to be 5.1 per cent, compared with the earlier estimate of 4.6 per cent.

Core inflation is projected at 4.7 per cent, up from the previous forecast of 4.4 per cent.

Despite the increase, retail inflation remains below the RBI’s 4 per cent target and is expected to stay within the central bank’s tolerance band of 2-6 per cent during the fiscal year, providing room to keep interest rates unchanged.

The RBI now expects India’s economy to grow by 6.6 per cent during the current financial year, down from the 6.9 per cent forecast issued in April.

For the financial year ended March 31, 2026, India’s economy is expected to have grown 7.6 per cent. Official data is due later on Friday.

Malhotra said the global outlook and the possibility of a weak monsoon could create downside risks for growth.

However, he noted that economic activity has remained resilient, with high-frequency indicators such as industrial output and purchasing managers’ index data continuing to show steady momentum.

Rising inflation is expected to increase the likelihood of rate hikes later in the year.

“Given the RBI focus on amplified risks on the inflation front, we expect 50 basis points of rate hike beginning in October,” said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank.

Markets React Positively

Indian financial markets largely welcomed the RBI’s decision.

India’s benchmark 10-year government bond yield edged lower to 6.96 per cent after the announcement, while the rupee strengthened 0.35 per cent to 95.48 against the US dollar.

Benchmark equity indices extended early gains. The Nifty 50 rose 0.27 per cent to 23,479.95, while the BSE Sensex gained 0.35 per cent to 74,616.31 as of 11:07 a.m. IST.

Thirteen of the 16 major sectoral indices traded higher. The broader small-cap and mid-cap indices each advanced 0.6 per cent.

Financial stocks led gains after the policy announcement. The financial sector index rose 1.1 per cent, while state-owned lenders gained 1.5 per cent.

A rate pause is viewed as supportive for financial companies and public sector banks because it reduces the risk of higher funding costs, supports credit demand and gives lenders more time to benefit from earlier rate cuts.

“Maintaining policy stability provides reassurance to businesses and consumers while preserving flexibility to respond, should inflationary pressures intensify further,” said Shishir Bhaijal, international partner, chairman and managing director and Knight Frank India.

(With inputs from Reuters)