India ramps up support for faltering rupee after holding fire on rates

MUMBAI: The Reserve Bank of India held its policy rate steady on Friday and unveiled steps to pull in dollars, seeking to shore up an embattled rupee as the economy grapples with costly oil and foreign outflows in the wake of the Iran war.

The measures include scrapping capital gains tax for foreign holders of government bonds, sweetening dollar deposit schemes for non-resident Indians, and subsidising hedging costs for offshore borrowing.

The RBI’s rate panel voted unanimously to keep the policy repo rate unchanged at 5.25%, a decision predicted by nearly 80% of 56 economists polled by Reuters.

The monetary policy committee also stuck to its “neutral” stance.

“The central bank’s rate panel noted that the global environment has deteriorated,” RBI Governor Sanjay Malhotra said while announcing the policy decision. The panel felt it was “prudent” to wait until greater clarity emerges, he said.

While inflation is expected to rise, underlying price pressures remain benign, Malhotra said. Second-round effects of the price pressure warrant vigil, he said.

Also read: India ramps up defence of faltering rupee after holding fire on rates

India’s benchmark 10-year bond yield tipped slightly lower to 6.96%, after the RBI decision, while the rupee rose 0.35% to 95.48 against the dollar. The benchmark equity indexes added marginally to early gains, and were up 0.2%.

A war-driven surge in crude prices and record foreign fund outflows have pushed the rupee down nearly 5% to historic lows since the Gulf conflict erupted late in February, fuelling calls from some analysts for higher rates to defend the currency.

Across the region, policymakers are already moving to shore up their currencies. Indonesia, the Philippines and Sri Lanka have raised interest rates in recent weeks, while South Korea has held fire but signalled a turn is imminent.

Steps to support Rupee

The RBI held rates to avoid further pressure on growth, while policymakers moved separately to support the rupee.

The government, alongside the RBI’s announcement, said it will scrap capital gains tax for foreign investors and removed the 20% tax on interest earned from such investments, effective from April 1, 2026.

Foreign investors are subject to a 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months.

Separately, the RBI said it will offer concessional forex swaps until September 30 to encourage state-owned firms to tap dollar borrowings.

It will also compensate banks for hedging costs on 3-year and 5-year foreign currency non-resident deposits aimed at the Indian diaspora.

Taken together, the measures could draw in $40–60 billion, said Sachchidanand Shukla, group chief economist at Larsen & Toubro.

Also read: India needs to monitor Iran war impact, RBI report says

The rupee has slid 5% this year after a similar drop in 2025. Economists warn higher oil prices and capital outflows could widen India’s balance of payments deficit to about $65 billion this fiscal year.

Higher inflation; lower growth

The central bank updated its economic forecasts for the current financial year.

Average retail inflation for the year is now projected at 5.1% compared with 4.6% earlier.

The central bank expects core inflation at 4.7%, up from its earlier projection of 4.4%.

Retail inflation in India remains below the 4% target and is projected to stay within the central bank’s tolerance band of 2-6% in the current fiscal year, giving the RBI headroom to hold interest rates.

GDP growth in the current financial year is now expected at 6.6%, below the 6.9% forecast in April. In the year ended March 31, 2026, India’s economy is expected to have grown 7.6%. Data is due later on Friday.

The global outlook and the prospect of a weak monsoon could add downside risks to growth, Malhotra said.

Economic growth has held up well so far with high-frequency indicators such as industrial output and the purchasing managers index showing steady momentum.

Rising inflation will likely prompt rate hikes in the second half of the year.

Given the RBI focus on “amplified risks on the inflation front, we expect 50 basis points of rate hike beginning in October,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.