The government and the Reserve Bank of India (RBI) have introduced new measures aimed at enhancing the balance of payments (BoP) by over $30 billion in the short term. These initiatives are anticipated to reduce the current account deficit (CAD) and increase capital inflows, as per HSBC. Market attention was divided between rupee support strategies and the policy rate decision leading up to the June policy meeting.
The RBI’s approach appears to be twofold, with a strong emphasis on foreign exchange (FX) through a comprehensive set of measures, while maintaining a conservative stance on rates by keeping the repo at 5.25 per cent, aligning with expectations. The recent measures by the authorities, including the RBI and the government, are designed to attract foreign investments into India. These include a subsidized window for NRI deposits and a more affordable forex swap to incentivize PSUs to raise ECBs.
The simultaneous introduction of these measures indicates a comprehensive strategy. In a bid to support Foreign Institutional Investor (FII) investment in government bonds, the authorities have reduced the long-term capital gains tax and withholding tax on interest income. Additionally, the range of fully accessible securities (FAR) has been expanded to include G-secs of various tenures without investment limits.
The report highlights that even if the immediate inflows are modest, these steps are crucial for deepening the market, especially if they facilitate bond index inclusion in the medium term. Notably, there were no explicit measures to curb capital outflows by individuals or corporates, a move that has been positively received. Accelerating the timeline for exporters to repatriate proceeds from 15 months to nine months is expected to bring in inflows sooner. Previous actions to narrow the current account deficit, such as increasing petrol and diesel prices, are also projected to aid in deficit reduction.
