How Finance Sector Stakeholders Read RBI's Latest Policy Move
The Reserve Bank of India's decision to leave the repo rate unchanged at 5.25 per cent while raising its inflation forecast and lowering growth projections has sparked debate across the financial sector over the likelihood of future rate hikes and the effectiveness of the central bank's push to attract foreign capital.Alongside the status quo on rates, the RBI unveiled a series of measures aimed at boosting foreign inflows, supporting the rupee and easing external sector pressures, prompting market participants to assess whether capital-account interventions can buy policymakers enough time before monetary tightening becomes necessary.
Opening The Gates To Global Capital
The RBI expanded the Fully Accessible Route (FAR) framework to include all new issuances of 15-, 30- and 40-year government securities and removed investment and concentration limits for foreign portfolio investors under the General Route. It also increased investment caps for NRIs and OCIs while introducing measures to encourage FCNR(B) deposits and external borrowings.
Amit Modani, Senior Fund Manager and Lead - Fixed Income at Shriram AMC, viewed the policy as a coordinated fiscal and monetary effort to attract foreign capital, stabilise the rupee and address balance of payments pressures. According to him, "the fixed-income risk-reward matrix has decisively shifted away from aggressive duration positions", with structural inflows into domestic debt markets dependent on factors such as index inclusion flows, global yields and international yield spreads.
"This policy was more about addressing the paucity of foreign flows into the Indian economy and addressing the external sector problems," argued Indranil Pan, Chief Economist at YES BANK. He estimated that measures relating to FPI participation, FCNR(B) deposits and concessional forex swaps could potentially attract between USD 35 billion and USD 45 billion in inflows, helping bridge the anticipated balance of payments gap during FY27.
Higher Inflation, Tougher Choices
The RBI lowered its FY27 GDP growth forecast to 6.6 per cent from 6.9 per cent and raised its inflation projection to 5.1 per cent from 4.6 per cent. It also projected inflation to rise to 5.9 per cent in the third quarter of FY27, reflecting concerns around elevated energy prices, supply-chain disruptions and weather-related risks.
For V K Vijayakumar, Chief Investment Strategist at Geojit Investments, the revised growth and inflation forecasts reflected a realistic assessment of the economic impact of elevated energy prices and global uncertainties. He noted that "the revision of inflation upwards indicates that rate hikes are likely later in the year", with the eventual course of action dependent on incoming economic data and the evolving macroeconomic environment.
"The surprise was that MPC chose to retain the status quo on policy rates while projecting an inflation of 5.10 per cent for FY27," said Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund. In his view, inflation evolving broadly in line with the RBI's projections could result in up to 75 basis points of policy tightening during FY27.
Yield Curve Repricing Begins
The bond market responded positively to the policy measures, with government bond yields softening by around four basis points while corporate bond yields declined by nearly 25 basis points, according to market participants. Expectations of stronger foreign participation in debt markets also strengthened sentiment across fixed-income segments.
Bond market movements suggest investors were focused more on the structural measures than on the rate decision itself, according to Dhiraj Relli, Managing Director and Chief Executive Officer of HDFC Securities. He described the policy as "a well-calibrated policy on balance" that seeks to defend the currency, maintain inflation discipline and support growth.
While the repo-rate decision was widely expected, Siddharth Chaudhary, Head – Fixed Income at Bajaj Finserv Asset Management, believes the real significance of the policy lies in the RBI's efforts to deepen access to global capital. According to him, "the RBI has chosen to stand still, but not to stand idle", signalling a broader strategy to strengthen external financing channels without disturbing the rate path.
Balancing Growth And Stability
The RBI projected economic growth at 6.3 per cent in the second quarter of FY27, improving to 6.5 per cent in the third quarter and 6.8 per cent in the fourth quarter, while highlighting sustained credit flows, strong capacity utilisation and government capital expenditure as key supports for economic activity. The central bank also flagged geopolitical tensions, commodity price volatility and weather-related uncertainties as risks to the outlook.
For financial inclusion players, policy stability matters as much as policy easing. Shams Tabrej, Co-founder and Chief Executive Officer of Ezeepay, said "policy stability is equally important as policy easing" as it provides visibility on funding costs and supports sustainable credit expansion across retail, MSME and rural segments.
Looking ahead, the trajectory of global interest rates, food inflation and domestic crop output will be crucial variables for policymakers, noted Ankita Pathak, Head – Global Investments at Ionic Asset. She maintained that "rate hike remains on the card in the H2 of the year", although the timing will depend on developments in global markets, domestic agricultural output and inflation trends.
Industry participants broadly indicated that future policy expectations will be shaped by the trajectory of inflation, foreign capital inflows and global macroeconomic developments in the months ahead.
Pages:
[1]