RBI Holds Rates at 5.25%, Rolls Out Rupee-Support Measures
In brief
- RBI held repo rate at 5.25% for third consecutive meeting on June 5.
- Central bank unveiled tax exemptions for foreign investors on government securities and rupee-support measures.
- RBI cut GDP growth forecast to 6.6%, raised inflation projection to 5.1%.
Rates and Stance
The RBI voted unanimously to maintain its neutral policy stance, keeping its standing deposit facility rate at 5.0% and the marginal standing facility and bank rate at 5.5%. The central bank is caught between two forces. Inflation is climbing, growth is slowing, and geopolitical chaos—particularly tensions involving Iran—has sent energy prices soaring. India imports roughly 85% of its crude oil, making it acutely vulnerable to energy shocks.
Raising rates would defend the rupee but choke an already decelerating economy. Cutting them would be reckless with inflation running hot. The RBI chose a middle path: hold the line on rates, but get creative elsewhere.
Rupee Support and Forecasts
The RBI unveiled a package of measures aimed at attracting foreign capital inflows to support the rupee, including tax exemptions for foreign investors on interest income and capital gains from government securities. It also offered more favorable terms for foreign-currency deposits from non-resident Indians and rolled out subsidies on hedging costs for certain offshore borrowings.
On the growth front, the picture darkened. The RBI cut its GDP growth forecast for fiscal year 2026/27 to 6.6%, down from a previous estimate of 6.9%, while raising its inflation projection to 5.1% from 4.6%. These moves signal the RBI's concern that external shocks and domestic headwinds are eroding India's growth trajectory even as price pressures persist.
Digital Currency and Stablecoin Risk
The RBI continues to push its digital rupee as a tool for financial stability. The central bank is advocating for its central bank digital currency, the digital rupee, as a means to offer digital payment convenience while maintaining control over monetary flows. At the same time, the RBI has continued to flag USD-denominated stablecoins as potential risks to financial stability, underscoring New Delhi's broader push to keep digital payments within the central bank's purview.
