RBI, Govt Measures Could Attract Foreign Inflows Of $ 45-80 Billion
The Monetary Policy Committee (MPC) of the RBI on Friday maintained the repo rate steady at 5.25 per cent and retained a neutral stance in line with expectations: Reports
MUMBAI: The slew of measures announced by the Reserve Bank of India (RBI) and the central government last week to improve the appeal of India’s debt markets to overseas investors, and stabilise the currency could attract inflows of around $45-80 billion in bonds and equities, almost
enough to close the gap for the anticipated Balance of Payment (BoP) for FY27, said economists.The Monetary Policy Committee (MPC) of the RBI on Friday maintained the repo rate steady at 5.25 per cent and retained a neutral stance in line with expectations. Alongside the rate decision, the RBI announced a six-point package aimed at boosting capital inflows via G‑Secs, Foreign Portfolio Investments and FCNR(B) deposits.
The RBI announced concessional forex swap facility until September 30 2026 for 3–5-year External commercial borrowings raised by Central Public Sector Enterprises (CPSEs). It also announced FCNR(B) deposits in the 3–5-year range with full hedging cost borne by the RBI.
Other measures were expanding the universe of specified securities for foreign portfolio investment (FPI) in government securities, removing various limits on FPI investment in G-secs under the general route, raising the limit for investments by NRIs and overseas citizen of India in equity instruments traded on the stock market without SEBI registration.
Complementing these efforts, the government also exempted foreign portfolio investment (FPIs) from income tax on interest income and capital gains arising from investments in government securities. The exemption, effective April 1, 2026, will apply to all interest and capital gains earned by FPIs on G-Sec investments from that date onwards.
According to Axis Asset Management, the RBI’s measures to attract capital inflows along with the government’s move to withhold tax for FII investments could collectively support inflows of up to US$75-80 billion.
“We believe the RBI’s approach to attracting capital inflows is both timely and appropriate, and the withholding tax could lead to India’s inclusion into Bloomberg Indices (Global Aggregate Bond Index). We expect these measures to collectively support inflows of up to US$75-80 billion,” said Axis Asset Management.
Indranil Pan, chief economist at YES BANK said, “While it is difficult to exactly pin down the exact nature of inflows, USD 35-45 billion may be a decent estimate, almost enough to close the gap for the anticipated BoP for FY27.”
According to Madhavi Arora, lead economist at Emkay, the government along with the RBI measures would help shore up the currency and could potentially lead to USD30-50 billion of inflows in the year.
However certain economists said that heightened global uncertainties remain a risk for capital flows in the short term.
According to Crisil Intelligence, while the various measures will support FPI flows in the debt segment, current global risk-off sentiment amid the West Asia conflict can limit the gains. Besides,
elevated US rates somewhat cap the relative attractiveness of emerging market sovereign debt currently.
RBI MEASURES IN DETAIL:
The RBI introduced a concessional forex swap facility until September 2026 to incentivise ECB borrowing by public sector entities, along with a similar facility for banks to raise 3-5 years FCNR(B) deposits with RBI bearing the full hedging cost. Banks are also allowed to raise ECBs with a concessional forex swap.
The RBI increased the range of government securities (G-Secs) FPIs could invest in the debt market. Under the fully accessible route (FAR), longer-tenor government bonds of 15, 30, 40-year tenors will
now be available for FPIs, compared with limiting them under 10-year tenors earlier. In addition, restrictions on short-term investments, concentration limits and individual security exposure for FPIs under the General Route have been removed.
In a further step to ease capital inflows, investment limits for NRIs and Overseas Citizens of India in listed equity instruments without SEBI registration have been increased, with similar access now
extended to all individual person’s resident outside India (PROIs).
Additionally, the timeline for realization of export proceeds has been restored to nine months, providing greater flexibility to exporters.
Meanwhile, the MPC revised its FY27 CPI inflation forecast upward to 5.1 per cent from 4.6 per cent and lowered its real GDP growth estimate to 6.6 per cent from 6.9 per cent.
The central bank highlighted elevated energy prices, supply-side disruptions, weaker monsoon expectations, and the risk of El Niño as key downside risks to growth.
The G-Sec yields softened by around 4 basis points after the policy announcement reflecting steady sovereign demand. Corporate bond yields fell sharply by around 25 basis points.
