The Reserve Bank of India (RBI) kept its key policy repo rate unchanged at 5.25% on Friday and also took a slew of steps to attract foreign investors. By expanding access to long-term government debt, easing investment limits, and providing temporary hedging support, the RBI signalled that “all hands are on deck” to spur dollar inflows without restricting monetary policy.
According to NSDL and market data, foreign portfolio investors (FPIs/FIIs) have withdrawn more money from Indian equities in the first five months of 2026 than in all of 2025. Cumulative FPI equity outflows reached ₹2.25 lakh crore in 2026, exceeding the ₹1.66 lakh crore withdrawn during all of 2025. According to Reuters, the rupee lost nearly 5% after the conflict intensified, making India one of the weaker-performing emerging-market currencies this year.
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Repo rate unchanged amid external pressures
In its June 5 policy review, the RBI’s Monetary Policy Committee (MPC) unanimously voted to hold the repo rate at 5.25%.
The RBI “held its policy rate steady… and unveiled steps to attract foreign investors and pull in dollars, seeking to shore up an embattled rupee” amid “costly oil and foreign outflows” triggered by the US-Iran war.
Governor Sanjay Malhotra noted in the press conference that the global environment had deteriorated, and the panel deemed it “prudent” to wait for greater clarity prior to shifting rates.
Instead of raising rates to defend the currency, the RBI opted for capital-account measures. Today’s policy was read by analysts as a balance-of-payments package: the repo rate was kept reserved for inflation, while exchange-rate stability would be managed through the capital account.
The government also acted in tandem, introducing tax exemptions to reinforce the effort: as part of the package, it scrapped capital gains tax and a 20% interest tax on foreign investments in government bonds, effective 1 April 2026.
Taken together, these steps are intended to stem outflows and make India’s debt and equity markets more attractive to overseas investors.
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Six new measures to boost foreign inflows
The RBI’s announcement included six main measures specifically targeting foreign capital.
- Expanded Fully Accessible Route (FAR): All new issuances of 15-year, 30-year and 40-year government bonds will be included under the FAR, allowing unlimited foreign ownership. This significantly expands the set of long-dated Indian government securities in major global bond indices.
- Lifted FPI restrictions: The RBI removed short-term investment limits, concentration limits and individual-security caps for foreign portfolio investors (FPIs) investing through the general route. In effect, FPIs no longer face those earlier ceilings when buying Indian debt or equity, easing sizeable technical barriers.
- Higher NRI/OCI limits: Investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equities have been raised, and registration requirements relaxed. The facility has now been extended to all individual persons residing abroad (PROIs), widening the pool of diaspora investors who can participate without Sebi registration.
- Concessional FX swaps for ECBs: The RBI will offer a subsidised dollar swap window for about four months (until 30 September 2026) to encourage state-owned companies to raise foreign-currency loans (External Commercial Borrowings). This lowers the cost for select firms to tap global markets.
- Hedging-cost support for FCNR(B): Banks will get compensation for the full hedging cost on 3- to 5-year foreign currency non-resident (bank) deposits (FCNR(B)) until 30 September. This incentivises more USD deposits by the Indian diaspora and offshore foreign banks.
- Faster export remittances: The RBI restored the export proceeds realisation period to 9 months (from the previous 15 months). Exporters will now have to repatriate foreign-currency payments within 9 months, which should bring dollars into India faster.
These new measures (plus the tax breaks from the government) “ticked all boxes to spur dollar inflows and stabilise the currency,” according to an economist at DBS Bank. They cover both debt and equity channels and intend to address technical frictions that were cited by foreign funds and index providers.
Market impact
Following the announcements, India’s 10-year government bond yield fell to about 6.96%, and the rupee firmed modestly. For example, one report noted the rupee rose about 0.35% to ~₹95.48 per dollar immediately after. However, economists indicate that much depends on external conditions (especially oil prices) before an enduring turnaround in the rupee can be achieved. Kotak Securities suggested the rupee could recover towards the mid-94 level if oil stays below $100, but would still encounter headwinds.
The urgency of these RBI measures was stressed by recent capital-flow data; foreign investors have pulled out record sums from Indian markets this year. According to official figures, FPIs withdrew roughly Rs 2.25 lakh crore (≈$27 billion) from Indian equities in January–May 2026, surpassing the total for all of 2025. Inflows into government bonds were also weak through Q1 2026. In fact, Business Standard noted that between 1 April and 2 June 2026, FPIs net sold about $13.4 billion of equities and $0.3 billion of debt.
This selloff has been attributed to a mix of factors: soaring crude prices (fed by the Middle East conflict), a sharply weaker rupee, and more attractive investment opportunities abroad. Moneycontrol reported that FPIs were net sellers in every month of 2026 except February, and sold a record Rs 1.17 trillion in March alone. The sustained outflows had made India one of the worst-performing emerging-market currencies in 2026.
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What it means
The new measures enhance access and returns for foreign investors by widening the FAR and removing various caps, allowing overseas funds to deploy larger sums into Indian government bonds and equities more freely. Mainly, the tax exemptions on G-Sec investments (exempting both interest and capital gains) raise the post-tax yield of Indian debt.
On the equity side, higher NRI/OCI limits and relaxed FPI norms should broaden the investor base. The subsidised hedging facilities also lower currency risk for corporates and banks.
In short, the RBI and the government have tried to level the playing field for India relative to its peers by reducing the structural disadvantages faced by foreign buyers.
For the Indian markets, the moves are an attempt to stem rupee weakness and support liquidity without choking growth.
The stock market reaction was mixed: some bank and NBFC shares jumped on expectations of funding stability, while IT and pharma (which earn in dollars) fell during the brief rupee rally. Overall, brokers expect these measures to moderate currency volatility, at least in the short term, and to anchor foreign demand for Indian assets.
Last year, policymakers had begun to liberalise debt markets (for example, in May 2025 the RBI scrapped the 30% short-term limit and 15% concentration limit for FPIs in corporate bonds).
An RBI economist noted that measures by the government (tax breaks) and central bank will “address the single biggest friction” flagged by global bond funds. If these changes succeed in luring back even a portion of the outflows, the rupee could appreciate somewhat from current levels, analysts say. However, success will depend on wider global factors: a drop in oil prices, continued foreign earnings growth in India, and sustained geostrategic stability.
