RBI's reform package could pull $40-75b inflows, push rupee to 92-93 and keep August rate on hold
New Delhi, June 6
The Reserve Bank of India's announcements after the monetary policy committee meeting are some measures aimed at flipping the rupee narrative from depreciation risk to inflows, SBI research and Kotak Securities said in their respective research reports.
SBI projects at least $40 billion of capital flows that could pull the rupee back toward 92-93 levels, while Kotak estimates the full package may bring $50-75 billion. Both houses expect the MPC to pause in August, keeping the repo rate at 5.25% with a "neutral" stance, even as inflation vigilance rises and growth forecasts are trimmed.
The Monetary Policy Committee (MPC) unanimously held the repo at 5.25% and retained neutrality. RBI cut FY27 real GDP growth 30 bps to 6.6% on weak global demand, supply chain disruptions and El Nino risks. Q3 growth was lowered 50 bps to 6.5%. CPI inflation for FY27 was revised up 50 bps to 5.1%, with Q3 at 5.9% and Q4 at 5.4%. Core CPI rose 30 bps to 4.7%.
SBI notes the policy language has shifted toward "inflation vigilance and external sector defense" while signaling calm to avoid speculative attacks on the rupee. RBI emphasized that rupee moves are sometimes out of sync with fundamentals, pushing back on calls for it to weaken toward 100.
The forward-looking impact comes from a slew of capital-flow reforms. RBI expanded the Fully Accessible Route to include new 15-, 30- and 40-year G-secs and removed the 30% short-maturity limit. With Rs 1.5 lakh crore of the new tenors yet to be issued and Rs 4.06 lakh crore headroom under the general route, SBI expects stronger FPI demand, lower long-end yields, lower government borrowing costs and better liquidity. Government tax exemption on interest and capital gains for FPIs adds post-tax returns of Rs 4,000-5,000 crore plus Rs 500-1,000 crore, strengthening India's case for global bond index inclusion. Kotak also flagged liberalization of equity investment limits for NRIs/OCIs and all PROIs without SEBI registration.
For the currency, RBI is bearing full hedging costs at 2.5% annually on fresh 3-5 year FCNR(B) deposits till Sept 30, 2026, plus SLR/CRR costs. SBI sees banks offering 5.5%+ rates, similar to the $34 billion mobilized in 2013, as 5-year tenors reduce rollover risk. A concessional FX swap for 3-5 year PSU ECBs till September 30 should accelerate overseas borrowing by PFC, REC, NTPC after ECB/FCCB flows fell 30% in FY26 to $42.9 billion.
Kotak notes this gives a breather to domestic capital markets and improves visibility for India Inc overseas. RBI also restored export proceeds realization to 9 months from 15 months, bringing forex in faster.
The market witnessed immediate reaction with rupee appreciating 50 paise, 10-40 year G-sec yields down 4-5 bps, 2-3 year corporate bond yields down 20-25 bps, OIS curve down 10-15 bps.
On rates, SBI believes RBI will "look through inflation prints" and expects an August pause, with growth considerations trumping aggressive hikes. Kotak, however, sees ~50 bps of hikes likely in FY27 given the 5.1% inflation projection, though markets have already discounted 50-75 bps. Liquidity remains in surplus at ~Rs 1.39 lakh crore in June so far, and drawdowns of government cash balances plus monsoon currency return should aid banking system liquidity in the near term.
— ANI
Reader Comments
RBI is playing a smart game here - using the current surplus liquidity to signal stability while rolling out capital-friendly reforms. The 50 paise jump in rupee is just the beginning. I think if they manage the FCNR deposits well (like 2013), we could see rupee stabilizing around 92-93 as SBI predicts. But inflation at 5.1% is concerning for common people like us.
Interesting to see RBI using multiple tools simultaneously. The bond market liberalization should definitely help with index inclusion. However, I'm a bit worried about the growth-inflation trade-off they're facing. Cutting growth forecast while raising inflation projection - that's a tough balancing act. Let's see if the "neutral" stance holds in August.
Honestly, I've heard promises of $40-75 billion inflows before. Remember the FCNR scheme in 2013? It worked temporarily but didn't solve the structural issues. The real problem is our current account deficit and export competitiveness. Making borrowing easier for PSUs like PFC and NTPC is good, but we need broader reforms to sustain this momentum. Just my two paise! 😊
As someone who follows Indian markets closely from abroad, this is a welcome package. The 10-40 year yield drop of 4-5 bps is already showing market confidence. But I'm curious about the 5.1% inflation projection - seems a bit high for a "neutral" stance. RBI might need to hike rates later if growth picks up. Overall, good tactical moves though.
R Rohit P Finally some good We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.