RBI Monetary Policy: The Reserve Bank of India (RBI) may have left the repo rate unchanged at 5.25%, but it was the central bank’s aggressive measures to attract foreign capital and support the rupee that captured the attention of bond market participants.
Announcing its June monetary policy decision, the RBI unanimously voted to keep rates unchanged and retained its neutral stance, a move that was widely anticipated by economists. At the same time, the central bank unveiled a series of measures aimed at strengthening foreign capital inflows as the economy grapples with elevated crude oil prices, foreign fund outflows and a weakening rupee following the Iran war.
The measures included scrapping capital gains tax for foreign investors in government bonds, removing the 20% tax on interest earned from such investments with effect from April 1, 2026, offering concessional forex swaps until September 30, and subsidising hedging costs for overseas borrowing and foreign currency non-resident deposits. The RBI also expanded the Fully Accessible Route (FAR) by including new issuances of 15-year, 30-year and 40-year government securities.
Following the announcement, India’s benchmark 10-year government bond yield eased slightly to 6.96%, while the rupee strengthened 0.35% to 95.48 against the US dollar. Equity markets also extended gains, with benchmark indices rising around 0.2%.
What it means for the bond markets?
While the policy rate decision was largely in line with expectations, bond market experts said the real significance lay in the package of measures designed to attract foreign capital and ease pressure on the rupee.
“A primary policy focus was combating severe capital flight, highlighted by $13.7 billion in net FPI equity outflows this fiscal year up to June 2. To attract foreign capital and stabilize the Rupee, the RBI and government deployed aggressive interventions, including tax exemptions, FAR expansion and concessional forex swap facilities,” said Archit Doshi, Senior Vice President at PL (Prabhudas Lilladher) AMC.
Doshi believes the policy stance is clearly supportive of bond markets, as well-capitalised banks and NBFCs stand to benefit from the targeted hedging subsidies and measures aimed at maintaining systemic stability. He added that investors may need to remain cautious on rate-sensitive sectors, which could continue to face pressure from higher inflation expectations and the possibility of future monetary tightening.
The government’s simultaneous decision to exempt foreign investors from capital gains tax on government bonds and remove taxes on interest income was viewed as an important complement to the RBI’s efforts to attract overseas capital. Together, the measures are expected to improve the attractiveness of Indian debt markets at a time when global investors remain sensitive to currency and geopolitical risks.
Yield Outlook Hinges on Crude Oil and Inflation
Bond market participants also highlighted the importance of the RBI’s forex and borrowing-related initiatives in shaping future yield movements.
“The MPC policy was broadly in line with expectations, but the more significant takeaway lies in the measures announced around foreign capital flows, external borrowing and forex management. While government security yields softened by around 4 basis points, corporate bond yields declined nearly 25 basis points,” said Basant Bafna, Head-Fixed Income at Mirae Asset Investment Managers.
According to Bafna, policy rate cuts over the past two years have not fully translated into lower borrowing costs for corporates and public sector undertakings because of strong credit demand and supply pressures in the domestic debt market. He expects the latest measures to encourage more overseas borrowing by PSUs, thereby reducing domestic bond supply and supporting lower yields. He also believes the policy reflects confidence in India’s macroeconomic fundamentals, balancing growth support, inflation management and external sector stability.
Despite the supportive measures, some experts remain cautious about the inflation outlook.
“RBI kept the repo rate unchanged at 5.25% and maintained its stance as Neutral. GDP growth has been revised to 6.60% from 6.90% and CPI inflation has been revised to 5.1% versus 4.4% projected in the previous policy meeting. With CPI inflation revised higher, we may expect a rate hike in the coming months,” said Murthy Nagarajan, Head-Fixed Income at Tata Asset Management.
Nagarajan noted that the bond market has already priced in three potential rate hikes, with the benchmark 10-year yield trading around 7%. He expects bond yields to remain largely range-bound in the coming months, though a sustained rise in crude oil prices above $100 per barrel could alter the outlook. He added that the 10-year benchmark yield has been trading in the 6.96%-6.99% range as market participants had largely anticipated no change in the repo rate.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
