RBI policy: $75bn inflow plan meets FY27 inflation risks

Repo rate held at 5.25%, stance stays neutral

The Reserve Bank of India (RBI) kept policy rates unchanged, with the Monetary Policy Committee (MPC) unanimously maintaining the repo rate at 5.25% and retaining a neutral stance. The package, however, was not a status quo moment for markets. Alongside the pause, the RBI and the central government announced multiple measures aimed at improving foreign currency inflows and deepening the government securities market. Analysts described the approach as a two-pronged strategy: support the rupee and market liquidity now, while keeping room to respond if inflation pressures broaden.

This combination matters because it targets both the balance of payments and the domestic cost of funds. If inflows rise and funding constraints ease, short-term money market rates can soften even without an immediate repo cut. But if inflation rises toward levels projected by the RBI, the market is also preparing for the possibility that the next major rate move could be a hike rather than a cut.

What the RBI announced to attract dollar inflows

A key part of the policy package focused on encouraging foreign currency inflows through targeted windows and broader investor access. Measures cited by market participants and bank research include:

• A concessional foreign exchange swap window to incentivise external commercial borrowings (ECBs) by public sector undertakings (PSUs), described as being for 3-5 year PSU ECBs and available until September 30.
• Support measures for FCNR (B) deposits, including the ability for banks to raise 3-5 year foreign currency term deposits with the RBI bearing the full hedging cost, according to commentary cited in the reports.
• Expanded access for overseas investors and NRIs/OCIs.
• A change in export proceeds rules, with the RBI restoring the export proceeds realisation timeline to 9 months from 15 months, aimed at bringing foreign currency into the system faster.

ICICI Bank Global Markets estimated these measures could attract nearly $10 billion in inflows. Dealers also indicated the FCNR (B) window could deliver the biggest and fastest flows, estimated at $10-25 billion, while the PSU ECB swap facility was estimated at around $10-15 billion.

Bond market access widened through the Fully Accessible Route

On the debt side, the RBI expanded the Fully Accessible Route (FAR), allowing foreign investors greater access to Indian government securities. The FAR expansion includes new 15-, 30- and 40-year tenors, and reports also noted the removal of limits under the general route and the removal of a 30% short-maturity cap.

These steps are designed to make India’s bond market easier to access at scale, which matters for passive flows and index-linked allocations. The broader intent, as framed by multiple research houses, is to strengthen India’s case for inclusion in Bloomberg’s global bond index.

Government tax changes to boost foreign demand for G-secs

The central government complemented the RBI’s measures with tax concessions aimed at making Indian government securities more attractive for foreign investors. Reports noted tax steps such as a cut in capital gains tax and the withdrawal of withholding tax on interest for government securities, including an exemption for foreign portfolio investors (FPIs) from income tax on interest income and capital gains from G-secs that was stated to be effective retrospectively from April 1.

One report quantified potential benefits from the exemptions: Rs 4,000-5,000 crore plus Rs 500-1,000 crore. Together with the FAR expansion, ICICI Bank Global Markets said the changes could pave the way for Bloomberg index inclusion, with analysts estimating $15 billion of additional debt inflows if inclusion materialises.

How much inflow is the Street pencilling in

Estimates varied by institution, but the direction was consistent: markets see the policy package as a meaningful attempt to shift the rupee narrative from depreciation pressure toward inflows.

• SBI Research estimated at least $10 billion of capital flows and suggested this could support the rupee toward 92-93 levels.
• Kotak Securities estimated the full package could bring $10-75 billion.
• ICICI Bank Global Markets flagged ~$10 billion from the swap and borrowing windows, plus $15 billion if Bloomberg bond index inclusion happens.
• Economists cited in the reports also linked the package to the expected balance of payments gap. HDFC Bank’s Sakshi Gupta said the combined impact could help bridge a $10-50 billion BoP gap estimated for FY27 (based on assumptions including a current account deficit of 2.1% of GDP and average crude oil prices of $10 per barrel). YES Bank’s Indranil Pan estimated $15-45 billion as a reasonable combined inflow estimate.

Market moves: yields eased after the announcement

Financial markets responded positively to the measures, particularly on the rates curve. Reports said corporate bond yields in the 2-3 year segment fell by 20-25 basis points, while the OIS curve moved down by 10-15 basis points. The logic is straightforward: a clearer inflow path can improve system liquidity and reduce near-term funding stress, which tends to pull down CD/CP rates and support the corporate bond market.

The policy package was also framed as improving funding visibility for Indian issuers abroad, especially in a period of elevated geopolitical risk, including the ongoing West Asia conflict referenced in the reports.

Inflation outlook revised up, and the rate path is contested

Despite the inflow optimism, inflation remains the central constraint for monetary policy. The RBI revised its FY27 consumer price inflation projection up by 50 basis points to 5.1% and raised core CPI to 4.7%. Quarterly CPI projections cited were 4.2% (Q1), 5.1% (Q2), 5.9% (Q3) and 5.4% (Q4).

ICICI Bank Global Markets expects cumulative rate increases of 50-75 basis points over coming quarters to bring inflation back toward the 4% target, noting that “each meeting is live” if price pressures generalise. Kotak also sees around 50 bps of hikes likely in FY27, given the 5.1% inflation projection, while SBI expects the RBI to “look through inflation prints” and prioritise growth, at least in the near term.

Growth and external risk: why the package targets the BoP

The RBI also lowered its GDP growth projection to 6.6%, citing rising geopolitical uncertainties, elevated crude oil prices and global volatility. In this context, inflows serve a dual purpose: they can help cover a projected BoP gap and reduce the need for sharp monetary tightening purely to defend the currency.

Separately, other reports noted the RBI has considered a wider toolkit to stabilise the rupee, including the possibility of additional swaps and overseas dollar-raising options. A $1 billion swap auction was also referenced as a step to infuse liquidity and boost reserves in the immediate term.

Key numbers at a glance

Why this matters for investors and borrowers

For currency markets, the policy package is aimed at changing the near-term balance between dollar demand and supply by pulling forward inflows through swaps, deposits and faster export proceeds conversion. For fixed-income investors, FAR expansion and tax changes improve the probability of sustained foreign participation in G-secs, particularly if Bloomberg index inclusion follows.

For domestic borrowers, the near-term benefit comes from easing funding conditions, reflected in the reported decline in short-end corporate bond yields and the OIS curve. But the medium-term rate outlook remains anchored to inflation outcomes. If inflation tracks the RBI’s higher trajectory, analysts expect the MPC to consider hikes even while it pursues inflow-supportive measures.

Conclusion

The RBI’s latest policy decision kept the repo rate steady at 5.25%, but the broader package signalled active intent to attract foreign capital, support the rupee, and ease domestic funding stress. Research estimates suggest the measures could draw $10-75 billion in inflows, with another $15 billion possible if Bloomberg bond index inclusion materialises. The next inflection point for markets is likely to be inflation data versus the RBI’s revised projections, as research houses continue to debate whether the MPC’s pause extends into August or gives way to 50-75 bps of tightening over coming quarters.