As RBI Unveils Steps to Support Rupee, Here’s A Look at The Measures Aimed at Rescuing the Home Currency

Mumbai, June 5: The Reserve Bank of India (RBI) on Friday announced a string of measures to support the rupee, choosing to attract foreign capital over raising interest rates to defend the home currency. The central bank kept the repo rate unchanged at 5.25% against the backdrop of the rupee coming under pressure from rising crude oil prices and persistent foreign fund outflows.  

The rupee has weakened nearly 5% since February this year, hurt by a surge in oil prices following the conflict in West Asia and record foreign portfolio outflows from domestic markets. While several Asian central banks have responded to currency pressures with rate hikes, the RBI has held fire so far. 

RBI’s measures to support the rupee 

To attract foreign capital and ease pressure on the rupee, the RBI and the government announced several measures: 

Removed capital gains tax and interest tax on government bonds held by foreign investors, making Indian sovereign debt more attractive to overseas funds. 

Expanded the Fully Accessible Route (FAR) by including all newly issued 15-year, 30-year and 40-year government securities, allowing greater foreign participation in the bond market. 

Enhanced incentives for FCNR(B) deposits, with the RBI providing support for hedging costs incurred by banks raising foreign currency deposits from non-resident Indians (NRIs). 

Introduced concessional forex swap facilities for public sector entities raising funds overseas, aimed at encouraging foreign currency borrowings and boosting dollar inflows. 

Relaxed certain investment norms for non-resident investors, making it easier for overseas investors to deploy capital in India. 

Extended the export realisation period to nine months, giving exporters additional time to bring overseas earnings back into the country. 

Signalled readiness to use liquidity and market operations if required to maintain orderly conditions in the foreign exchange market. 

Potential foreign inflows 

The combined measures could generate foreign inflows over time, helping cushion the rupee against external shocks. Economists largely welcomed the approach, arguing that attracting capital is a more effective and less growth-damaging way to support the currency than raising borrowing costs.  

The market reaction was positive. The rupee strengthened after the announcement, while bond yields eased slightly as investors took comfort from the RBI’s decision to preserve growth-supportive monetary conditions while simultaneously addressing currency pressures through targeted measures.  

With crude oil prices remaining elevated and geopolitical risks still high, the effectiveness of these measures will be closely watched in the coming months as policymakers seek to stabilise the rupee without derailing economic growth. 

Source

• official announcements