The latest measures by the government and the Reserve Bank of India (RBI) to boost rupee and foreign capital could improve the balance of payments (BoP) by more than USD 30 billion in the short run, by both narrowing the current account deficit (CAD) and raising capital inflows, according to HSBC.
Ahead of the June policy meeting, markets were focused on two fronts: rupee support measures and the policy rate decision.
“We think the RBI took a split approach, going ‘all in’ on forex (FX) with a broad package of measures, while staying more restrained on rates by holding the repo at 5.25 per cent, in line with our expectation,” the report mentioned.
The authorities (the RBI and the government) announced a raft of measures to attract foreign inflows into India like a subsidised window for NRI deposits (where RBI will bear the full hedging cost for fresh 3-5 year deposits raised by banks until September 2026), and a cheaper forex swap to encourage PSUs to raise ECBs.
Launching both together signals an “all-in” approach.
To support FII investment in government bonds, authorities cut the 12.5 per cent long-term capital gains tax and the 20 per cent withholding tax on interest income.
The fully accessible securities (FAR) universe was expanded to include 15, 30, and 40-year G-secs, with no investment limits.
“Even if near-term inflows are modest, these are constructive market-deepening steps — particularly if they help pave the way for bond index inclusion over the medium term. Notably, there were no formal measures to restrict capital outflows by individuals or corporates. We view the absence of ‘capital controls’ positively,” said the report.
Shortening the timeline for exporters to repatriate proceeds (nine months compared to 15 months) should pull inflows forward over the next few months.
Earlier steps to narrow the current account deficit — such as raising petrol and diesel pump prices by Rs 7.5 per litre — should also help reduce the deficit, the report mentioned.
