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

The Reserve Bank of India’s (RBI) Monetary Policy Committee unanimously decided to keep the benchmark repo rate unchanged at 5.25% on Friday, maintaining a cautious ‘wait-and-watch’ stance amid escalating geopolitical risks and inflation pressures. Market participants had anticipated a pause, given rising uncertainty from the West Asia crisis, which has driven crude oil prices higher and triggered foreign fund outflows. Despite the hold, economists now speculate a 25-basis-point rate hike could occur by year-end, following recent policy tightening moves by central banks in Indonesia and the Philippines. To support the rupee, the RBI introduced measures including a concessional forex swap facility until September 30 to lower costs for public sector undertakings borrowing overseas, and eased norms for external commercial borrowing (ECB) and foreign currency non-resident (FCNR) deposits. These steps aim to attract foreign capital inflows and stabilize the currency, which has depreciated over 6% against the US dollar this year and was the worst-performing Asian currency in 2025. The rupee briefly recovered from 95.67 to 95.24 per dollar post-announcement, though traders warn it could breach 100 per dollar in the medium term. RBI Governor Sanjay Malhotra emphasized that geopolitical tensions, elevated oil prices, and supply-side disruptions may force global central banks to tighten monetary policy further. India’s foreign exchange reserves remain robust at $682.3 billion, covering 11 months of imports and external debt. The central bank also highlighted recent trade agreements and relaxed foreign direct investment (FDI) norms as tools to strengthen the balance of payments. Equity markets showed little reaction to the policy decision, while government bond yields declined as the RBI and government announced steps to make sovereign bonds more attractive to foreign investors. Foreign portfolio investors continue to pull funds from Indian markets, shifting toward safe-haven assets like the US dollar and gold. The RBI’s measures aim to counter these outflows by incentivizing foreign capital through reduced hedging costs and expanded investment avenues for non-resident Indians (NRIs) and overseas citizens of India (OCIs).