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Informist, Saturday, May 23, 2026

 

By Aaryan Khanna

 

NEW DELHI – Most economists who met Reserve Bank of India officials in two groups Thursday suggested that the central bank avoid hiking the repo rate in June, five people who participated in the meetings told Informist. Instead, they suggested that the regulator take steps to attract capital inflows to curb the rupee's decline. The Indian currency has tumbled over 5% since the war in West Asia began.

 

The broad consensus was that the RBI's Monetary Policy Committee should remain on pause on rates until at least the August policy meeting, the participants said. Some economists advocated a rate hike in June, while others argued against repo rate increases altogether to ensure economic growth remains robust in the financial year 2026-27 (Apr-Mar), the participants said. Calls for rate hikes have increased in response to the war, which has led to a surge in wholesale inflation that is expected to feed into consumer prices over the next few months.

 

"A majority of people did not think a rate hike in June was appropriate, especially for a rupee defence," one of the participants said. "It would require a very sharp rate hike to make any difference to the rupee, while possibly causing havoc on the growth front."

 

India's overnight indexed swap rates had briefly priced in a 50-basis-point rate hike by the Monetary Policy Committee in June, though expectations had softened to a 25-bp increase by Friday's close. These positions had largely been erased Monday. Standard Chartered Bank and MUFG Bank have forecast a 25-bp hike in the policy repo rate in both June and August. Rate hikes typically lead to higher bond yields, potentially attracting foreign investments and supporting the domestic currency. However, the rupee's weakness has been exacerbated by expectations of a wider current account deficit and equity outflows of over $20 billion since the war began.

 

All the economists who attended the meetings were from banks. The measures discussed to attract capital included dollar-denominated sovereign bonds, encouraging domestic institutions to borrow in foreign currency, and a high-rate foreign-currency non-resident scheme, the participants said. Although the issuance of a sovereign bond overseas was discussed, India has never done so and is unlikely to do so at the current juncture, two of the participants said. 

 

The meetings were attended by top officials of the RBI, including Governor Sanjay Malhotra. The RBI officials did not signal any views during the first meeting, but at the second meeting, they asked about the potential impact of rate hikes on growth. They also noted the criticism the RBI had faced in 2013 for introducing a subsidised scheme to attract inflows through foreign currency non-resident deposits. At the conclusion of the meetings, RBI officials asked the economists to separately submit their recommendations on capital inflows.

 

Some economists also urged the RBI to reduce the withholding tax on interest and dividend income, currently at 20%. The RBI and the finance ministry have received proposals from market participants to lower the withholding tax rate on government bonds to attract foreign investment and help protect India's foreign exchange reserves, a senior government official had told Informist earlier in the month. The government had maintained the tax at a concessional rate of 5% until August 2023.

 

"Withholding tax could help with several things, including better demand for ECB (external commercial borrowing)," another participant at the RBI meetings said. "A uniform rate of 5% would be good for inflows in the medium term and it is not going to lead to a big fall in revenue (for the government)."

The economists also recommended that the RBI address the skewed ratio of importer and exporter hedging of foreign-currency exposure. This could be done by allowing dollar-rupee forward rates to rise sharply or by reducing the export realisation window to nine months from the current 15 months, the participants said.

 

According to market participants, data from the Clearing Corp. of India showed that the ratio of importer hedging to exporter hedging was at 7:3 in April. Exporters hedging against rupee appreciation or realising export proceeds support the domestic currency. However, exporters have little incentive to hedge because they expect the domestic currency to weaken further, improving their realisations. 

 

The economists were broadly aligned on GDP growth and inflation forecasts for FY27. The economists suggested that the RBI lower its GDP growth forecast for FY27 by 40 basis points to around 6.5% while raising its average CPI inflation projection to around 5% from the current 4.6%. The central bank had flagged downside risks to growth and upside risks to inflation at the previous meeting of the rate-setting panel.  End

 

US$1 = INR 95.23

 

With inputs from Priyasmita Dutta

Edited by Rajeev Pai

 

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