How the RBI's Latest Policy Impacts the Rupee, Markets and Bonds | Explained

The Reserve Bank of India’s Monetary Policy Committee on Friday decided unanimously to keep the benchmark repo rate unchanged at 5.25%. Market participants had largely expected a rate pause amid rising uncertainty stemming from the West Asia crisis.

However, markets and economists are now anticipating a likely rate hike, possibly of 25 basis points, by the end of this year.

Announcing the policy, RBI Governor Sanjay Malhotra reiterated that the central bank and its rate-setting panel maintain a cautious “wait-and-watch” approach before making any changes to policy rates.

He stated that the adverse economic impact of rapidly evolving geopolitical tensions, elevated crude oil prices, and supply-side concerns are likely to compel global central banks to pivot towards monetary policy tightening.

Other Asian central banks, including Bank Indonesia and the central bank of the Philippines, delivered policy rate hikes last month.

Several reports had speculated that the RBI may consider raising interest rates to protect the rupee. The Indian rupee has been under immense pressure since the onset of the West Asia war, which began on February 28, due to soaring crude oil prices and foreign fund outflows.

Indian financial markets have also witnessed a continued mass exodus of foreign portfolio investors as investor sentiment remains jittery and funds continue to move towards safe-haven assets, including the US dollar and gold.

So what does the status quo in today’s policy decision mean for the markets?

Currency Market

Following the policy announcement, the Indian rupee surged against the greenback as the RBI unveiled several measures to attract foreign fund inflows. The Indian rupee was the worst-performing currency in 2025, having depreciated by over 10% against the greenback.

So far this year, the rupee has fallen more than 6% against the US dollar, with traders anticipating it could breach the psychologically crucial level of 100 per dollar in the medium term.

The rupee rose from 95.67 in early trade to 95.24 after the policy announcement. India’s foreign exchange reserves stood at $682.3 billion, adequate to cover 11 months of imports and external debt.

Malhotra also highlighted that recent trade agreements and economic frameworks with major partners, the easing of foreign direct investment norms, and the liberalisation of the external commercial borrowing (ECB) framework are expected to strengthen India’s balance of payments.

The RBI announced a concessional forex swap facility until September 30 to incentivise ECBs by public sector undertakings. With this move, the RBI has reduced the cost for government-owned companies to hedge against currency fluctuations when borrowing dollars from overseas.

The move is aimed at encouraging more foreign loans to flow into India, increasing the supply of dollars in the financial system and helping support the rupee during periods of global uncertainty.

A similar facility is also being provided to Authorised Dealer (AD) banks to bear the full hedging cost of raising fresh 3-5 year FCNR(B) deposits.

“We welcome the RBI easing the route for NRIs, OCIs and other overseas investors into Indian equities,” Aravind Agarwal, Managing Director, Bandhan Group said. “It is a practical move that draws the diaspora deeper into our capital markets and widens the pool of foreign capital… if global conditions settle and domestic demand holds, India can keep growing without straining its macro stability.”

Equity Market

The equity market has witnessed sharp selling by foreign investors, with net outflows from India standing at $13.7 billion. The hot-money flight has put further pressure on the rupee, forcing the RBI to intervene in the foreign exchange market to limit the pace of the currency’s depreciation.

To attract foreign investors, the RBI announced several measures at today’s policy meeting.

The investment limits for non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) in equity instruments traded on stock exchanges without SEBI registration have been increased. The higher limits have also been extended to all individual Persons Resident Outside India (PROIs).

The equity market did not react immediately to the policy measures. Benchmark indices were down 0.2% and remained in the red.

Government Debt Market

The RBI also announced the scrapping of capital gains tax for foreign holders of government bonds. Foreign investors currently pay a capital gains tax of 12.5% and a withholding tax of 20% on investments held for more than 12 months.

Following the announcement, India’s benchmark 10-year bond yield fell to 6.95%. Bond prices and yields move in opposite directions.

The RBI announced that, for government securities under the Fully Accessible Route (FAR), it is expanding the list of “specified securities” by including all fresh issuances of 15-, 30-, and 40-year tenor government securities.

Further, limits relating to short-term investment, concentration, and individual securities under the General Route for FPI investments are also being removed.

Separately, the Centre on Friday announced that foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) will be exempt from capital gains tax and interest income tax on investments in government securities, with retrospective effect from April 1, 2026.

“These measures, along with the tax benefits provided by the government this morning, should help attract foreign capital for government borrowing,” Malhotra said.