RBI Announces Measures to Stabilize Rupee

The Reserve Bank of India (RBI) has announced a series of measures aimed at stabilizing the rupee, which has weakened over 5% since January due to rising oil prices and significant equity outflows. The central bank plans to exempt foreign investors from capital gains tax on government bonds starting April 1, 2026, as part of efforts to attract foreign capital.

The RBI is also expanding the range of government securities available to non-resident investors and removing limits on short-term investments for foreign portfolio investors. These moves come amid a record sell-off in Indian equities and rising oil import costs. Foreign investors have withdrawn nearly $28 billion from Indian equities this year but invested $1.4 billion in government debt.

The rupee's decline has been exacerbated by geopolitical tensions, including Iran launching ballistic missiles towards regional neighbors Kuwait and Bahrain, and U.S. forces conducting strikes on Iran's Qeshm Island. The RBI kept its key policy rate unchanged at 5.25%, maintaining a 'neutral' stance but raising inflation projections to 5.1% from 4.6%. India imports almost 90% of its crude requirements and half of its gas needs.

The proposed tax exemptions will take effect from April 1, 2026, according to a government release cited by CNBC. Currently, foreign investors pay a long-term capital gains tax of 12.5% on listed shares and bonds held over 12 months, along with a 20% withholding tax on interest from government bonds.

The RBI's Governor Sanjay Malhotra stated that these measures will improve India's balance of payments this year. Analysts suggest the tax exemptions could help stabilize the currency, though one economist cautioned it won't be a 'magic bullet' in the current context. Foreign investors have been pivoting to short-term Indian debt ahead of policy changes.

The RBI will offer hedging benefits to state-run companies raising external commercial borrowing and provide similar facilities for banks that raise three- to five-year deposits from non-resident Indians until September 30. State Bank of India expects inflows of more than $34 billion from FCNR (B) deposits alone.

The yield on India's 10-year benchmark bond ended at 6.9772% on Friday, down 2 basis points for the week after shedding 6 bps in the previous week. Bond yields eased as fears of aggressive rate hikes receded and RBI commentary was not considered hawkish.

Traders expect the 10-year yield to move within a range of 6.92% to 7.02%, with focus on rupee movements and reactions from foreign investors following recent policy tweaks by Indian authorities.