RBI does well to hold rates, shift focus to foreign capital
All these are steps in the right direction. Measures are needed to attract foreign capital. The economic situation calls for agile management
The central bank has also provided a concessional forex swap facility to incentivise external commercial borrowings, and a similar facility for bearing the hedging cost to banks for raising FCNR (B) deposits. The June meeting of the RBI’s Monetary Policy Committee was held against a challenging economic backdrop. Inflationary pressures have been building up, capital has been flowing out, the rupee is under pressure, and the underlying growth momentum remains unpredictable. The MPC, however, despite suggestions to the contrary, chose to keep interest rates unchanged at 5.25 per cent — rightly so — and also continued with the neutral stance. The continuing uncertainty over the conflict in West Asia and its spillover effects on growth and inflation call for a wait-and-watch approach.
On inflation, there is cause for concern. Headline retail inflation stood at 3.5 per cent in April. However, prices at the pump were raised in May. Price pressures are also being felt across various segments and the second-round effects of higher input costs will soon begin to show. The central bank has already raised its inflation forecast for the year to 5.1 per cent, up from the 4.6 per cent estimated in its April meeting. Food inflation is also a concern with a subnormal monsoon forecast and El Niño. All this implies that inflation is edging upwards at a time when growth appears to be slowing down — the central bank has projected GDP growth at 6.6 per cent for the year, down from its earlier estimate of 6.9 per cent. There are also downside risks to growth.
Alongside the policy, the government and the central bank announced several measures aimed at attracting foreign capital and easing pressure on the currency. The Centre has done away with the capital gains tax on FII investments in government bonds, and the withholding tax on their interest income. Alongside, the RBI has expanded the universe of government securities that fall under the fully accessible route. These moves could affect demand for government securities and there are implications for bond yields. The central bank has also provided a concessional forex swap facility to incentivise external commercial borrowings, and a similar facility for bearing the hedging cost to banks for raising FCNR (B) deposits. All these are steps in the right direction. Considering that foreign investors have taken out $28.6 billion from equity markets so far this calendar year and net FDI stood at just $7.65 billion in 2025-26, measures are needed to attract foreign capital.
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