OCBC reports that the Reserve Bank of India kept its policy rate at 5.25% but unveiled targeted capital flow measures, including concessional FX swaps and tax exemptions for foreign investors in government bonds. These steps should support India’s balance of payments and the Rupee near term, though the bank still expects 50 bp of tightening in FY27 as food and energy inflation pressures build.

Capital flow tools and future tightening

"At the June RBI meeting, the policy rate was unanimously held at 5.25%, but the focus was on a suite of capital flow measures."

"These include concessional FX swap rates, available through 30 September, to encourage state-owned firms and banks to raise USD funding. The RBI also announced tax exemptions for foreign investment in government securities, tightened rules on export proceeds repatriation, and broadened the pool of eligible long-tenor government bonds for foreign institutional investors."

"Overall, these steps are incrementally positive for India’s balance of payments and could lift market sentiment, providing near-term support to INR. That said, our economists still expect cumulative tightening of 50bp in FY27."

"Risks are tilted towards more hikes, as inflation pressures are building not only from energy but increasingly from food."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)