The main feature of the MPC announcement was its focus on steps to boost capital flows and shore up the currency | Photo Credit: DANISH SIDDIQUI

The Monetary Policy Committee (MPC) has acted along expected lines by holding the status quo on repo rate and retaining the stance at ‘neutral’. This wait-and-watch strategy — which entails being ‘data dependent’ — is a sensible one, given the uncertainty over the duration of the Iran war. If the war winds down and cools global prices and markets, a rate hike that raises business costs would seem inappropriate.

The main feature of the MPC announcement on Friday — its outlook on growth and inflation held out few surprises — was its focus on steps to boost capital flows and shore up the currency. The Reserve Bank of India did well in not using the interest rate to achieve similar objectives. Given India’s robust macros, such a move would have sent contrary confidence signals. On the domestic scene, RBI Governor Sanjay Malhotra has acknowledged risks to the ‘baseline assessments of inflation and growth’. While altering the growth and inflation projections over the April policy (reducing the first by 30 basis points to 6.6 per cent and raising the second by 50 basis points to 5.1 per cent), the RBI has amply indicated at rate hikes are on the cards. This is understandable for an inflation-targeting central bank that needs to anchor rising inflationary expectations. Apart from the war’s impact on prices, the sub-normal monsoon forecast has complicated the scenario.

Meanwhile, growth remains delicately poised. As the GDP data released on Friday for the last quarter of FY26 shows, a growth rate of 7.8 per cent in Q4 is buoyed by an encouraging 7.1 cent rise in consumption expenditure, and a 10.8 per cent increase in capital formation. This could slip, as firms postpone fresh investments amidst uncertainties. As regards external account measures, foreign portfolio flows into G-secs are being encouraged by expanding the list of securities eligible for the Fully Accessible Route to securities of longer tenures, such as those in the 15, 30 and 40 year range. There are fewer restrictions under FAR, and it is typically used by global bond funds. It is good that the RBI is targeting the FAR route since ₹16,567 crore of net FPI inflows were recorded through this route in 2026 so far. Investment in India debt through the general limit, however, recorded a net outflow or ₹4,025 crore.

With the Centre also exempting FPI investments in G-secs from capital gains and tax on interest income, inflows from this channel are expected to rise. Relaxations have also been provided to NRIs, overseas citizens of India and persons resident outside India (PROI) for investing into capital markets. Besides these, RBI is also trying to raise NRI deposits and external commercial borrowings by offering to reduce the hedging cost. However, some factors need to be watched. Higher inflation will narrow the real interest rate spread between G-secs and other sovereign bonds. The domestic real interest rate should not dip too much. In sum, a fine policy balance is called for.

Published on June 5, 2026