Key Moments
- The Reserve Bank of India (RBI) kept its policy rate unchanged at 5.25% with a neutral stance, marking a third consecutive meeting at this level.
- INR strengthened after new RBI and government measures were announced to attract foreign capital and improve the balance of payments.
- BBH’s Elias Haddad warns that persistent energy shocks are likely to merely slow INR depreciation rather than fully correct its perceived undervaluation.
RBI Holds Rates Steady, Aligning With Market Expectations
Brown Brothers Harriman’s (BBH) Elias Haddad reports that the Reserve Bank of India (RBI) kept its key policy rate at 5.25% and maintained a neutral policy stance, in line with the majority of market forecasts.
“The Reserve Bank of India (RBI) left the policy rate at 5.25% for a third consecutive meeting and maintained its neutral stance. 32 of the 38 analysts polled by Bloomberg expected no change, the rest had a 25bps hike penciled in.”
Rupee Reaction to Policy and Capital Inflow Measures
The Indian Rupee (INR) outperformed following the announcement of a coordinated package by the RBI and the government designed to channel more foreign capital into Indian assets and support the external accounts.
“INR outperformed across the board because India rolled out a set of packages to draw in foreign capital. The RBI alongside the government announced today measures aimed at strengthening India’s balance of payments by attracting more capital flows.”
According to Haddad, the central bank introduced a series of initiatives to simplify access to Indian markets for foreign participants.
“The RBI introduced five measures that make it easier for foreign investors to buy government bonds and stocks and encourage foreign currency deposits.”
Tax Incentives for Foreign Institutional Investors
The policy push includes fiscal incentives targeted at foreign institutional investors, focusing on holdings of Indian government securities.
“In parallel, the government granted tax exemption to foreign institutional investors retroactively from April 1, 2026 on ‘any interest on government security, and any capital gains arising from the sale, exchange or transfer of such government security.'”
| Policy Element | Description |
|---|---|
| Policy rate decision | RBI kept the policy rate at 5.25% with a neutral stance for a third consecutive meeting. |
| Market access measures | Five RBI measures to facilitate foreign investment in government bonds, stocks, and foreign currency deposits. |
| Tax treatment | Tax exemption for foreign institutional investors from April 1, 2026 on interest and capital gains from government securities. |
Energy Shock Seen as Ongoing Headwind for INR
Haddad emphasizes that, despite the supportive policy backdrop for capital inflows, external risks tied to energy remain a key constraint on the currency’s performance.
“Nonetheless, until the energy shock fades, these steps to bolster capital inflows are more likely to slow INR depreciation than unwind its massive undervaluation. India is a net crude oil importer with around half of its oil imports passing through the Strait of Hormuz.”
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