RBI shifted its focus on FX management with a hawkish hold tone; will it work?

 

·    ·       Both the RBI and the govt are treating the ailing economy symptomatically with cyclical policy reforms; it needs structural reforms for structural issues.

·       Due to higher real rates (compared to super core CPI), higher cost of borrowing, and higher taxation, including energy costs for decades, along with extreme regulations & corruption, India has to reset from politics to policies.

·       Looking ahead, the RBI may be on hold with a hawkish stance (wait & watch) till at least December '26.

·       USDINR may appreciate 5-10% CAGR ‘naturally’ over the next ten years; this, along with potentially higher external debts (public + private), may cause India to face FX vulnerability for its domestic, savvy, import-oriented economy.

·       Muted supercore inflation for the last few quarters may be indicating subdued discretionary consumer spending (demand); the RBI needs to keep the policy rate at 3.00-3.50% (rather than 5.25%) to bring supercore CPI back to the target of 4.0% and bring down the unemployment rate below 4.5% (from the present 6.5%) as maximum and inclusive employment.

On Friday, June 5, 2026, India’s central bank, the RBI, left all key policy rates unchanged, as widely expected. The RBI MPC, led by Governor Malhotra, voted unanimously to hold all key rates, i.e., the repo rate at 5.25%; the standing deposit facility (SDF) or the effective reverse repo rate (ERR) at 5.00%; and the marginal standing facility (MSF) and bank rates at 5.50%, while keeping the cash reserve ratio (CRR) steady at 3.00% with a neutral stance. The Reserve Bank of India (RBI) maintained its key repo rate at 5.25% for the 3^rd consecutive MPC meeting in June after cutting it by 25 bps at the December '25 meeting and a cumulative 125 bps in 2025. As a recapitulation, RBI delivered bigger than expected rate cuts of 50 bps on June 6, 2025 (y/y).

RBI Rationale for Holding Rate

The MPC assessed evolving global and domestic developments. While domestic demand (private consumption, investment) remains resilient with strong services exports, government capex, and credit growth, significant upside risks to inflation and downside risks to growth have emerged. The Committee chose to pause and wait for greater clarity on the duration and intensity of global shocks.

Revised Economic Projections for FY27)

·       Real GDP Growth: 6.6% (revised down from 6.9% in April).

·       CPI Inflation: 5.1% (revised up from 4.6%).

·       Risks tilted upwards, particularly in Q3.

Main Concerns:

·       Prolonged West Asian (Middle East/Iran) conflict and elevated global crude oil prices, as a result of the lingering blockade of the Strait of Hormuz

·       Supply chain disruptions (fuel & fertilizer) and higher freight & insurance costs.

·       Recent domestic fuel price hikes and potential pass-through to other prices.

·       Monsoon uncertainties (subnormal prospects, El Niño risks).

·       Potential second-round effects on inflation expectations.

Other Important Announcements / Tone

·       RBI is monitoring inflation expectations closely and remains data-dependent and nimble.

·       Emphasis on healthy foreign exchange reserves and measures to support capital inflows and orderly market conditions (building on the MPC resolution).

·       India’s economy is described as resilient but facing external headwinds.

New Measures Announced to Attract Foreign Capital

·       Government Securities (G-secs)

Expand ‘specified securities’ under Fully Accessible Route (FAR) to include all new issuances of 15-, 30-, and 40-year tenor G-secs.

o Remove limits on short-term investment, concentration, and individual securities for FPI under the General Route.

o Expected to support government borrowing alongside the tax benefits announced by the government.

·       Equity Investments by Individuals Abroad

: Increase investment limits for NRIs and OCIs in listed equities (without SEBI registration).

o Extend the same facility to all Persons Resident Outside India (PROIs) at par with NRIs/OCIs.

·       External Commercial Borrowings (ECBs)

o Concessional forex swap facility for PSUs till September 30, 2026.

·       FCNR (B) Deposits

o Facility for Authorized Dealer (AD) banks to bear the full hedging cost for fresh 3–5 year FCNR(B) deposits till September 30, 2026.

·       Exports

: Restore the time limit for realization of export proceeds to nine months.

Exchange Rate Policy (Reiterated)

·       It remains market-determined—no specific level or band is targeted.

·       RBI will not resist market-driven adjustments but will curb excessive volatility and prevent disorderly movements.

·       Strong forex reserves + regulatory tools provide a robust buffer.

·       RBI stands ready to act as needed: “whatever it takes to preserve orderly market conditions.”

These measures are clearly aimed at boosting capital inflows and supporting the balance of payments amid global headwinds and recent FPI outflows.

Tax Benefits Announced by the Government/Ministry of Finance (June 5, 2026)

These were announced via the Income Tax (Amendment) Ordinance, 2026, on the same morning as the RBI policy announcement. They directly complement the RBI’s measures on G-secs to attract foreign capital.

Key Tax Exemptions for Foreign Investors (FPIs / FIIs)

·       Full exemption on

interest income earned from government securities (G-Secs).

o Capital gains (both short-term and long-term) arising from the sale, exchange, transfer, or redemption of G-Secs.

Previously

·       20% withholding tax on interest income.

·       12.5% Long-Term Capital Gains (LTCG) tax (for holdings > 12 months).

·       Higher rates for short-term gains.

·       Effective date: Retrospective from April 1, 2026 (covering the current financial year).

The exemption applies to eligible Foreign Portfolio Investors (FPIs), Foreign Institutional Investors (FIIs), and the Bank for International Settlements (BIS), subject to prescribed disclosure/reporting requirements.

Removal of Restrictions under the General Route (for FPI investments in G-Secs)

·       Withdraws three major limits

·       Short-term investment limit

·       Security-wise limit

·       Concentration limit

This significantly eases investment for FPIs under the General Route.

Expansion of Fully Accessible Route (FAR) – Additional ‘Specified Securities’

·       New G-Sec Issuances: All new 15-year, 30-year, and 40-year tenor government securities.

·       Sovereign Green Bonds: All new issuances in 5-, 7-, 10-, 15-, 30-, and 40-year tenors.

·       Existing securities added

Effective Date: Immediate (June 05, 2026).

Purpose and Expected Impact

·       Make Indian G-Secs significantly more attractive to global investors (pension funds, sovereign wealth funds, insurance companies, etc.).

·       Support government borrowing by increasing demand for bonds.

·       Help counter recent FPI outflows (US$13.7 billion in early FY27, mainly equities) and ease pressure on the rupee and balance of payments amid high energy prices.

·       Combined with RBI’s expansion of the Fully Accessible Route (FAR) and removal of various investment limits, this creates a more competitive, tax-friendly regime for foreign debt investment.

Note: These benefits are specific to G-Secs and do not extend to equities or corporate bonds.

Market Context

This is part of a coordinated RBI + government push to bolster capital inflows (FPIs). The market expects it could unlock substantial foreign inflows into the bond market, potentially lowering borrowing costs for the government and supporting forex reserves.

Full text of RBI policy statements

Monetary Policy Statement, 2026-27 Resolution of the Monetary Policy Committee June 3 to 5, 2026

Monetary Policy Decisions

The Monetary Policy Committee (MPC) held its 61st meeting from June 3 to 5, 2026, under the chairmanship of Shri Sanjay Malhotra, Governor, Reserve Bank of India. The MPC members Dr. Nagesh Kumar, Shri Saugata Bhattacharya, Prof. Ram Singh, Dr. Poonam Gupta, and Shri Indranil Bhattacharyya attended the meeting.

After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.25 percent. Consequently, the standing deposit facility (SDF) rate remains at 5.00 percent, and the marginal standing facility (MSF) rate and the Bank Rate remain at 5.50 percent. The MPC also decided to continue with the neutral stance.

Growth and Inflation Outlook

Global Outlook

As the West Asian conflict prolongs without any meaningful resolution in sight, risks to both inflation and growth have increased. Energy markets have been volatile; crude oil reserves are declining, and global commodity prices have firmed up. Faced with difficult trade-offs, monetary policy has turned more cautious. Major advanced economy central banks are likely to pivot towards monetary policy tightening. Global financial markets have shown mixed trends, with equities remaining buoyant, driven by AI optimism, while sovereign bond yields have hardened on fiscal sustainability concerns and inflation worries. The US dollar index has appreciated recently amid shifting rate expectations and changing risk sentiment.

Domestic Outlook

As per several high-frequency indicators, domestic economic activity has remained largely steady since the outbreak of the conflict. Private consumption has been resilient, while fixed investment maintained its momentum despite cost pressures. Merchandise exports recorded strong growth in April 2026, though elevated freight and insurance costs remain a drag. Services exports continued to be robust. While the economy has withstood the conflict spillovers with limited impact so far, the strains are increasingly becoming visible.

Looking ahead, elevated energy and other commodity prices, coupled with continued supply disruptions, are likely to affect economic activity. While import diversification in affected commodities has helped in improving supply, it comes at a higher cost. The full impact, however, will depend on the duration of the conflict, the time taken for normalization of supply chains, and the burden-sharing approach among the stakeholders. The south-west monsoon is expected to be deficient, with implications for agricultural activity and rural demand. However, the programs and initiatives for crop diversification, water harvesting and conservation, climate-resilient practices, and short-duration crops, among others, are expected to mitigate the impact.

Furthermore, sustained momentum in services, the continuing impact of GST rationalization, and broadly stable employment conditions should continue to support urban consumption. Strong capacity utilization, sustained credit flows from bank and non-bank sources, and the government’s capex are expected to support investment activity. While weak global demand and elevated freight and insurance costs are headwinds for merchandise exports, services exports are expected to remain steady.

Several measures undertaken by the government, including support to MSME and export sectors, efforts to ramp up domestic gas and crude supplies, encouraging the use of domestically produced alternatives to imported inputs, and diversification of critical imports, have strengthened the economy’s resilience to cope with external shocks.

Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 6.6 per cent, with Q1 at 6.6 per cent; Q2 at 6.3 per cent; Q3 at 6.5 per cent; and Q4 at 6.8 per cent. Prolonged global supply chain disruptions, heightened volatility in global financial markets, and weather-related shocks continue to pose downside risks to the domestic growth outlook.

Headline CPI inflation inched up to 3.4 per cent in March and 3.5 per cent in April 2026, primarily due to higher food inflation. Fuel inflation remained modest as retail fuel prices largely remained unchanged in March and April despite the sharp spike in international energy prices. Core (CPI excluding food and fuel) inflation remained unchanged at 3.7 percent during January to April. Excluding precious metals, core inflation remained much lower at 2.1-2.2 percent. This indicates that the input cost pressures, as reflected in a sharp increase in April WPI, have not yet fully manifested in CPI.

Since May, however, retail fuel prices have been raised cumulatively by 7.4 per cent for petrol and 8.4 per cent for diesel. The increase implies a direct impact of about 36 basis points on headline inflation, which, along with second-order effects, would be reflected in CPI inflation in the coming months. Pass-through of higher global energy prices is also visible in several other inputs, such as commercial LPG, industrial raw materials, chemicals, rubber, and plastic products. The second-round impact of higher input costs could exert upside pressure on CPI inflation going forward.

Considering all these factors, CPI inflation for 2026-27 is projected to be 5.1 percent, with Q1 at 4.2 percent, Q2 at 5.1 percent, Q3 at 5.9 percent, and Q4 at 5.4 percent. Core inflation is projected at 4.7 percent for 2026-27. Excluding precious metals, core inflation is projected to be lower, suggesting that demand pressures remain contained. These forecasts are subject to upside risks due to global supply chain disruptions and uncertainty about the spatial and temporal distribution of monsoons. However, an adequate stock of foodgrains and satisfactory reservoir levels provide some comfort.

Rationale for Monetary Policy Decisions

The global environment has deteriorated since the last policy meeting, with the conflict lingering amidst a fragile truce. The adverse implications of the extended disruption in supply chains and elevated energy prices are reflected in the moderation of growth and increase in inflation projections from the April policy as discussed above.

CPI inflation remains below the target despite the global shock, as the pass-through to domestic prices has been limited. While the baseline projections point towards headline inflation firming up towards the upper tolerance level in Q3:2026-27, the impact of the supply shock is expected to wane from Q4 onwards. The underlying inflation pressures continue to remain benign at this juncture. However, generalization of inflation through second-round effects on expectations and wages is a distinct possibility, warranting a close vigil. The outlook also remains clouded by the subnormal south-west monsoon forecast and El Niño risks.

As for growth, elevated energy prices coupled with global supply constraints are having adverse spillovers on economic activity. While domestic demand remains resilient and manufacturing and services sector activity continues to expand, there are incipient signs of moderation in some sectors, as suggested by high-frequency indicators.

As discussed above, there are considerable risks to the MPC’s baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the conflict, the magnitude of its spillover effects, and the pace of restoration of supply chains. Additionally, the food outlook remains uncertain on account of the subnormal southwest-west monsoon forecast and El Niño. Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge. Accordingly, the MPC voted to keep the policy rate unchanged. At the same time, the MPC will continue to remain data-dependent and closely monitor the developments, including supply-side pressures getting embedded in the general price level and inflation expectations. The MPC also decided to retain the neutral stance.

The minutes of the MPC’s meeting will be published on June 19, 2026.

The next meeting of the MPC is scheduled for August 3 to 5, 2026.

RBI Governor’s Statement: June 05, 2026

Good morning and Namaskar. Over the past few months, the global economy has been shaped by heightened uncertainty, disruptions to key trade routes and supply chains, increased market volatility, and cautious business sentiment.

Let me at the outset emphasize that the Indian economy entered this episode of global turbulence with much better fundamentals than in previous similar episodes. While we remain confident to withstand these shocks with minimum pain, it is important to not only confront and address these challenges but also take them as an opportunity to further enhance resilience.

Global economic outlook remains clouded by the continuing geopolitical impasse in West Asia, as sharply escalating energy prices and global supply chain disruptions continue to hinder economic activity. Faced with difficult trade-offs, monetary policy has turned more cautious. Major advanced economy central banks are likely to pivot towards monetary policy tightening. While equity markets remain buoyant, driven by AI-fueled optimism, global bond markets remain bearish amidst renewed inflation fears and continuing debt sustainability concerns. Risk-off sentiments and safe-haven demand are imparting volatility to forex markets, with a depreciating trend in many EME currencies.

Decisions of the Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC) met on the 3rd, 4th, and 5th of June to deliberate and decide on the policy repo rate. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.25 percent; consequently, the standing deposit facility (SDF) rate remains at 5.00 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 5.50 percent. The MPC also decided to continue with the neutral stance.

I shall now briefly set out the rationale for these decisions.

The committee noted that the global environment has deteriorated since the last policy meeting, with the conflict lingering amidst a fragile truce. The adverse implications of the extended disruption in supply chains and elevated energy prices are reflected in the moderation of growth and an increase in inflation projections from the April policy.

CPI inflation remains below the target despite global shocks, as the pass-through to domestic prices has been limited. While the baseline projections point towards headline inflation firming up towards the upper tolerance level in Q3:2026-27, the impact of the supply shock is expected to wane from Q4 onwards. The underlying inflation pressures continue to remain benign at this juncture. However, generalization of inflation through second-round effects on expectations and wages is a distinct possibility, warranting a close vigil. The outlook also remains clouded due to the subnormal southwest-west monsoon forecast and El Niño risks.

As for growth, the MPC noted that elevated energy prices, coupled with global supply constraints, are having adverse spillovers on economic activity. While domestic demand remains resilient and manufacturing and services sector activity continues to expand, there are incipient signs of moderation in some sectors, as suggested by high-frequency indicators.

The MPC thought that there are considerable risks to the baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the conflict, the magnitude of its spillover effects, and the pace of restoration of supply chains. Additionally, the food outlook remains uncertain on account of the subnormal southwest-west monsoon forecast and El Niño.

Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge. Accordingly, the MPC voted to keep the policy rate unchanged. At the same time, the MPC will continue to remain data-dependent and closely monitor the developments, including supply-side pressures getting embedded in the general price level and inflation expectations. The MPC also decided to retain the neutral stance.

Assessment of Growth and Inflation

Growth

The second advance estimates released by the National Statistical Office (NSO) placed India’s real GDP growth at 7.6 percent in 2025-26, owing to strong expansion in private consumption and fixed investment. The robust performance of the manufacturing and services sectors was the growth driver from the supply side.

As per several high-frequency indicators, domestic economic activity has remained largely steady since the outbreak of the conflict. India’s manufacturing and services PMI suggest that both sectors continue to be resilient, and business expectations are still positive. On the demand side, private consumption, aided by discretionary spending, has remained resilient so far. Fixed investment has also maintained its momentum despite cost pressures. Merchandise exports recorded strong growth in April 2026, notwithstanding elevated freight and insurance costs. Services exports are also holding up well, reflecting sustained demand despite concerns about AI. Overall, the economic situation has broadly exhibited resilience and withstood the conflict spillovers, although the impact of cost pressures is becoming visible.

Going ahead, the rise in prices of energy and other inputs, coupled with supply disruptions, is likely to weigh on economic activity. While import diversification in affected commodities is likely to improve supply, it would come at a higher cost. The full impact, however, will depend on the duration of the conflict, the time taken for normalization of supply chains, and the burden-sharing approach among the stakeholders. The pass-through of higher energy prices to retail products is already evident. Additionally, the projected deficiency in the south-west monsoon will have implications for agricultural production and rural demand. However, the programs and initiatives for crop diversification, water harvesting and conservation, climate-resilient practices, and short-duration crops, among others, are expected to mitigate the impact.

Sustained momentum in services, continuing impact of GST rationalization, and broadly stable employment conditions should continue to support urban consumption, even though rising inflation could be a drag on the purchasing power of households. Government capex is expected to remain robust. While the elevated capacity utilization and sustained credit flows from bank and non-bank sources are supportive of corporate investment, cost escalation and heightened uncertainty could dampen investor sentiment. Weak global demand and high logistics costs are headwinds for merchandise exports. Services exports, on the other hand, are expected to sustain their momentum as demand for Indian services remains healthy.

Several measures undertaken by the government, including support to MSME and export sectors, efforts to ramp up domestic gas and crude production, encouraging the use of domestically produced alternatives to imported inputs, and diversification of critical imports, should help cope with the external shocks.

Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 6.6 per cent, with Q1 at 6.6 per cent; Q2 at 6.3 per cent; Q3 at 6.5 per cent; and Q4 at 6.8 per cent. Prolonged global supply chain disruptions, volatility in global financial markets, and weather-related shocks continue to pose downside risks to the domestic growth outlook.

Inflation

16. Although firming up marginally from 3.2 per cent in February, headline CPI inflation was below the target during March and April 2026 (3.4 per cent and 3.5 per cent, respectively). While food inflation edged up, fuel inflation remained muted as retail prices of petrol and diesel were unchanged in March and April; inflation remained stable at 3.7 percent during March-April. Excluding precious metals, core inflation was much lower at 2.1-2.2 percent during the same period. International crude oil prices (Indian basket) have averaged around US$110/barrel during April-May 2026, and indications are that average oil prices for 2026-27 would be substantially higher than what were assumed during the last policy statement. Higher energy prices and an increase in several input prices also led to a sharp spike in WPI inflation in April 2026.

Turning to the inflation outlook, the partial pass-through of high global crude oil prices to domestic pump prices of petrol and diesel started in May. Prices of several inputs such as commercial LPG, industrial raw materials, chemicals, base metals, rubber, and plastic products, among others, have increased. These could exert upward pressure on CPI inflation in the coming months as firms pass on higher input costs.

1. Considering all these factors, CPI inflation for 2026-27 is projected to be at 5.1 percent, with Q1 at 4.2 percent, Q2 at 5.1 percent, Q3 at 5.9 percent, and Q4 at 5.4 percent. Core inflation is projected at 4.7 percent for 2026-27. These forecasts are subject to upside risks due to global supply chain disruptions, global commodity price shocks, and uncertainty about the spatial and temporal distribution of the southwest monsoon and El Niño conditions. Adequate stock of foodgrains and satisfactory reservoir levels, however, provide some comfort.

Liquidity and Financial Market Conditions

19. System liquidity, as measured by the net position under the LAF, stood at an average daily surplus of ₹2.63 lakh crore since the last MPC meeting in April 2026. The Reserve Bank proactively undertook durable and transient liquidity measures to ensure appropriate liquidity in the banking system. Going ahead, the usual drawdown of government cash balances after the RBI’s surplus transfer and the return of currency during the monsoon season will aid banking system liquidity in the near-term.

20. Since the April meeting, the weighted average call rate traded within the policy corridor, while short-term money market rates, especially rates of commercial papers and certificates of deposit, moderated before coming under pressure again in May. G-Sec yields eased in April following the ceasefire announcement in West Asia but firmed up in May. Transmission in the credit market has moderated during March-April, with some hardening in deposit and lending rates.

The Reserve Bank would ensure appropriate liquidity in the banking system to meet the productive requirements of the economy and facilitate monetary policy transmission.

As per the latest available data, credit from all sources grew by 15.4 per cent (y-o-y) in 2025-26 as compared to 12.1 per cent a year ago. Bank credit growth continued to remain robust and broad-based as market-based funding became costlier.

Financial Stability

The system-level financial parameters related to capital adequacy, liquidity, asset quality, and profitability of Scheduled Commercial Banks (SCBs) continue to remain healthy, although there is some moderation in profitability as compared to last year. Similarly, the system-level parameters of NBFCs are sound, with adequate capital position and improved GNPA ratios.

External Sector

I will now speak about the external sector. It successfully navigated the challenges of elevated tariffs and trade-related uncertainties in 2025-26 amidst a turbulent global economic environment. The surge in energy prices and persistent trade policy uncertainties continue to pose upside risks to India’s current account deficit in 2026-27. A services trade surplus and inward remittances are expected to provide some comfort.

On the external financing front, buoyant gross foreign direct investment (FDI) and higher net FDI in 2025-2633 underscore the continued interest of global investors in India. The FDI flows have also been encouraging in April 2026. During 2026-27 so far (till June 2), net FPI to India, however, witnessed outflows of US $13.7 billion, primarily in the equity segment.

As of May 29, 2026, India’s foreign exchange reserves stood at a healthy US$682.3 billion, adequate in terms of the standard metrics of reserve adequacy, including import cover (about 11 months) and external debt (89.1 percent). Various policy initiatives are expected to strengthen our balance of payments. These include the recent agreements with major trading partners, opening the insurance sector to 100 percent FDI, the ethanol blending program, the push for energy transition, easing of FDI restrictions for land-bordering countries, liberalization of the ECB framework, and several others.

To attract foreign capital, I also have a few measures to announce today.

First, for government securities under the Fully Accessible Route (FAR), we are expanding the universe of ‘specified securities’ by including all new issuances of 15-, 30-, and 40-year tenor G-secs. In addition, limits pertaining to short-term investment, concentration, and individual securities on FPI investment under the General Route are being removed. These measures, along with the tax benefits provided by the government this morning, should help attract foreign capital for government borrowing.

Second, the limits for investment by NRIs and OCIs in equity instruments traded on the stock market without SEBI registration are being increased. Further, the same facility is being extended to all individual Persons Resident Outside India (PROIs) at par with NRIs and OCIs.

Third, a facility of concessional forex swaps will be provided till 30th September 2026 to incentivize ECBs from PSUs.

Fourth, a similar facility for bearing the full hedging cost shall be provided till 30th September 2026 to AD banks for raising fresh 3–5-year FCNR (B) deposits.

Fifth, it is proposed to restore the time for realization of export proceeds to nine months.

While these measures are expected to strengthen our balance of payments, we will continue to make the right policy adjustments to further promote exports and attract and incentivize capital inflows.

As I have often reiterated, our exchange rate policy remains unchanged. We do not target any specific level or band; instead, we allow the exchange rate to be determined by market forces. Our experience, however, suggests that it may sometimes witness movements, often caused by speculative pressures, especially in the wake of heightened uncertainty, that are not in sync with fundamentals and are disruptive of economic activity.

While our objective is not to resist market-driven adjustments, we will curb excessive volatility and prevent disorderly market movements. While our foreign exchange reserves provide a strong buffer against external shocks, we have a broad range of regulatory and market-based instruments to respond effectively as may be required. In this regard, we remain vigilant and are fully prepared to do whatever it takes to preserve orderly market conditions.

Concluding Remarks

To conclude, global economic conditions and sentiments continued to be frayed without any meaningful resolution of the West Asia conflict. While these have adversely impacted the domestic growth-inflation outlook, the economy at this point is relatively strong. We shall put in place policies to meet the challenges while taking measures to further strengthen the macroeconomic fundamentals of the country.

RBI Notes on various economic data, including high-frequency data

·       Real GDP expanded by 7.8 percent in Q3:2025-26. Private consumption and gross fixed capital formation (GFCF) grew by 8.7 percent and 7.8 percent, respectively, in Q3:2025-26.

·       On the supply side, gross value added (GVA) at basic prices expanded by 7.8 percent in Q3. In 2025-26, Manufacturing rose by 13.3 percent, and services registered growth of 9.1 percent in Q3.

·       GST E-way bills increased by 11.8 percent in April 2026, while toll collections increased by 12.6 percent in May 2026.

·       GST revenue rose by a healthy 8.7 per cent in April 2026.

·       Domestic air cargo posted a growth of 8.2 percent in April 2026.

·       Motor vehicle sales (retail) grew by 5.7 percent in May 2026.

·       Port cargo witnessed a growth of 7.1 percent in FY: 2025-26.

·       PMI services for May 2026 improved to 59.8 from 58.8 in April 2026, riding on higher demand for services such as freight, digital solutions, e-commerce, entertainment, and IT.

·       India’s manufacturing PMI rose to 55.0 in May 2026, up from 54.7 in April.

·       Two-wheeler and tractor retail sales registered double-digit growth of 20.5 percent and 16.4 percent, respectively, in March-April 2026.

·       Demand for work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) declined by 31.0 percent in April-May 2026.

·       Credit to infrastructure increased by 9.5 percent during H2:2025-26 (1.9 percent in H1:2025-26).

·       Production and imports of capital goods increased by 14.2 per cent and 13.8 per cent, respectively, in H2.

·       IIP infrastructure and construction recorded a robust growth of 10.0 percent during H2, which is also corroborated by strong growth in steel consumption and cement production at 7.6 percent and 9.6 percent, respectively.

·       Fixed assets of listed non-government, non-financial companies (based on 4613 companies) registered a growth of 6.0 percent during H2, on a high base of 8.7 percent last year.

·       According to the monthly periodic labor force survey (PLFS), the all-India unemployment rate remained low at 5.2 percent in April.

·       Passenger vehicle sales at the retail and wholesale levels recorded double-digit growth of 11.5 percent and 24.6 percent, respectively, in April.

·       The central government’s capex is budgeted to expand by 11.5 percent in 2026-27.

· Effective capital expenditure (including grants in aid to state governments for capital expenditure) is budgeted to grow at 22.1 percent.

· Capital expenditure (capex) by large central public sector enterprises (CPSEs) and four key government entities rose by 63 percent year-on-year in April 2026.

· As per the early results of the quarterly order books, inventories, and capacity utilization (OBICUS) survey of the RBI, capacity utilization (CU) of the manufacturing sector is at 75.2 percent in Q4: 2025-26, which is above the long-term average of 74.0 percent.

· Bank credit to textiles, chemicals, base metals, gems and jewelry, and engineering goods increased y-o-y by 8.3 percent, 16.1 percent, 17.7 percent, 26.0 percent, and 30.8 percent, respectively, in April 2026.

·       Services exports expanded sharply by 7.2 percent in March and 12.7 percent in April 2026.

· Inflation in the CPI food and beverages division increased to 3.7 percent and 4.0 percent, respectively, in March and April from 3.3 percent in February 2026.

·       Fuel represents the group ‘Electricity, gas, and other fuels’ and class ‘Fuels and lubricants for personal transport equipment.' Fuel recorded a modest inflation of 0.9 per cent and 0.4 per cent in March and April, respectively.

· CPI core is defined as CPI excluding the food and beverages division and fuel (both the group ‘Electricity, gas, and other fuels’ and the class ‘Fuels and lubricants for personal transport equipment’).

·       According to the Petroleum Planning and Analysis Cell (PPAC), the Indian basket of crude oil (ICB) represents a derived basket comprising sweet-grade (Brent dated) and sour-grade (Oman and Dubai average) crude oil imported by Indian refineries during each month. The ICB ratio for April 2026 was 61.02:38.98, and that for May 2026 was 70:30. ICB prices averaged $114.5 in April and $106.2 in May.

·       WPI inflation increased from 3.9 percent in March to 8.3 percent in April as the index recorded a m-o-m increase of 3.9 percent, the highest momentum observed so far in the current series (2011-12=100).

·       Petrol and diesel prices were cumulatively increased by 7.4 percent and 8.4 percent, respectively, in May, which will contribute about 36 basis points to headline CPI.

·       WPI for the manufacture of rubber and plastic products, base metals, chemicals and chemical products, and textiles increased by 1.4 percent, 3.3 percent, 3.4 percent, and 2.6 percent, respectively, during April 2026.

·       Before the conflict, vessels passing the Strait accounted for close to 35 percent and 20 percent, respectively, of global seaborne trade in crude oil and refined petroleum products, as well as 20 percent of trade in liquefied natural gas (LNG).

·       The World Bank commodity price index increased by 30.3 percent during March-May 2026. On a year-on-year (y-o-y) basis, the index increased by 40.6 per cent in May.

·       On May 29, 2026, the Indian Meteorological Department's (IMD) forecast for the southwest monsoon over the country was at 90 percent of the long-period average (LPA) with a model error of ± 4 percent.

·       IMD forecasts that El Niño conditions are likely to develop during the southwest monsoon season. The National Oceanic and Atmospheric Administration, United States, projects an 82 percent probability of El Niño emerging during May-July 2026 and expects it to persist through December 2026 to February 2027 with a 96 percent probability.

·       As of May 16, 2026, the rice and wheat stocks stood at 695.5 lakh tonnes (5.1 times the buffer norm) and 465.1 lakh tonnes (6.2 times the buffer norm), respectively.

·       SCB Parameters: The outstanding credit and deposit increased by 16.52 percent and 12.09 percent on a year-over-year basis, respectively, between April '25 and April '26.

·       The system-level Capital to Risk Weighted Assets Ratio (CRAR) of 17.68 percent in March 2026 was well above the regulatory minimum level.

·       The ratio of non-performing loans improved further (GNPA ratio at 1.73 percent in March 2026, vis-à-vis 2.22 percent in March 2025; NNPA ratio at 0.40 percent in March 2026, vis-à-vis 0.50 percent in March 2025).

·       Liquidity buffers were robust, with an LCR of 123.70 percent as of the end of March 2026.

·       The annualized return on assets (RoA) and return on equity (RoE) stood at 1.33 percent and 13.06 percent, respectively, in March 2026. Net Interest Margin was 3.26 percent for March 2026 (3.46 percent in March 2025).

·       Net profit growth of SCBs moderated from 14.67% in FY 2025 to 6.0% in FY 2026 on a y-o-y basis, alongside a 20 bps compression in NIM from 3.46% to 3.26%, indicating increasing pressure on profitability during the period.

·       NBFC Parameters: The Total CRAR of NBFCs was 24.70 percent, and the Tier I CRAR was 22.86 percent in March 2026, well above the minimum regulatory requirements.

·       The GNPA ratio has improved from 2.25 percent in March 2025 to 1.83 percent in March 2026, while the NNPA ratio also improved from 0.98 percent in March 2025 to 0.81 percent in March 2026.

·       RoA for the sector decreased slightly from 2.90 percent in March 2025 to 2.56 percent in March 2026.

·       NIM has marginally increased from 4.55 percent in March 2025 to 4.56 percent in March 2026.

· Gross FDI flows to India grew by 17.3 percent to a historical peak of US $94.5 billion in 2025-26 from US $80.6 billion in 2024-25.

· Net FDI inflows increased to US $7.7 billion during 2025-26 from US $1.0 billion in 2024-25.

·       During April 1-June 2, 2026, net outflows from the equity and debt segments stood at 13.4 billion and US$0.3 billion, respectively.

· Trade deals with the UK and New Zealand have been signed; trade deals with the European Free Trade Association (EFTA) and Oman came into effect from October 1, 2025, and June 1, 2026, respectively; trade deals with the European Union have been concluded; and the interim trade deal with the US was announced in February 2026, with re-negotiations ongoing since April 2026.

·       Many more trade agreements are in the pipeline, for example, with Canada, Peru, Mexico, Bahrain, Qatar, and South Korea.

·       The average daily net absorption under the LAF increased from ₹1.7 lakh crore in March 2026 to ₹3.9 lakh crore in April but thereafter moderated to ₹1.7 lakh crore in May 2026. System liquidity averaged 1.3 lakh crore in June (up to June 3).

·       The Reserve Bank conducted a long-term forex buy/sell swap auction of USD 5 billion in May 2026.

·       Since the last MPC meeting in April, 11 VRR and 2 VRRR operations were conducted (up to June 3, 2026).

·       The WACR on average traded 4 basis points below the policy repo rate.

·       The rates on 3-month treasury bills, 3-month certificates of deposit, and 3-month commercial paper averaged 5.34 percent, 6.75 percent, and 6.99 percent, respectively, since the April policy, as compared to 5.32 percent, 7.16 percent, and 7.45 percent, respectively, between the February and April policies.

·       In response to the 125-basis-point (bps) cut in the policy repo rate cumulatively, the weighted average lending rate (WALR) of scheduled commercial banks declined by 83 bps for fresh rupee loans and 89 bps for outstanding loans during February 2025 - April 2026.

·       On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits declined by 85 bps, while that on outstanding deposits softened by 50 bps during the same period.

·       On a year-on-year basis, bank credit registered a growth of 16.2 percent as of May 15, 2026, compared to 9.8 percent a year ago.

·       Sector-wise data indicate buoyant credit flows to the retail and service sectors.

·       Industrial credit strengthened further, aided by sustained credit growth in MSMEs and a pickup in credit to large industries.

·       Agricultural credit grew at a steady pace.

Highlights of the RBI Governor’s comments in the post-MPC meeting presser/Q&A: June 5, 2026

·       TO OFFER CONCESSIONAL SWAP WINDOW FOR OVERSEAS BORROWINGS

·       INDIAN CURRENCY GAINS, WITH RUPEE MOVING TO 95.3 VERSUS 95.8 EARLIER

·       FORECASTS INDIA’S REAL GDP GROWTH AT 6.5% FOR Q3 FY27, ACCELERATING TO 6.8% IN Q4 FY27

· THERE ARE EARLY SIGNS OF MODERATION IN SOME SECTORS, BUT CONSIDERABLE RISKS TO INFLATION AND GROWTH REMAIN.

·       SENTIMENT-DRIVEN MOVES AND SAFE-HAVEN FLOWS ARE INCREASING CURRENCY MARKET VOLATILITY.

On Policy Decision & Stance

·       The MPC voted unanimously to keep the repo rate at 5.25% and retain the neutral stance (wait & watch).

·       Emphasized a data-dependent and nimble approach amid global uncertainties.

On Inflation & Policy Outlook

·       "The 4% inflation (total CPI) target is not in abeyance... it is sacrosanct." It is a medium-term target to be achieved over time. “It is not advisable to act on every small or large deviation... While the target is 4%, there can be fluctuations around that.”

·       Inflation is getting generalized; the RBI will be watchful and will act if it becomes persistent.

·       Revised FY27 CPI projection to 5.1% (up 50 bps), with risks tilted upwards, especially in Q3.

·       The assumption for crude oil rose to $95/bbl (from $85/bbl earlier).

·       Mentioned recent fuel price hikes and potential second-round effects; the situation currently appears "adverse," but it is too early to conclude a rate hike at the next meeting.

·       On whether higher inflation strengthens the case for a rate hike next meeting: “It is too early to make that assessment, though the situation appears adverse at the moment.”

·       “CPI inflation remains below the target despite the global shock... While the baseline projections point towards headline inflation firming up towards the upper tolerance level in Q3:2026-27, the impact of the supply shock is expected to wane from Q4 onwards.”

On Growth

·       Revised FY27 GDP growth down to 6.6% (from 6.9%).

·       Domestic demand remains resilient, but external headwinds (energy prices, supply chains, monsoon risks) pose downside risks.

·       “The global environment has deteriorated since the last policy meeting in April.”

· “India is not alone in the global shock; all economies are impacted. We are comparatively more resilient.”

·       “Some impact will be there on rural demand from monsoon projections.”

On Rupee & External Sector

· “In an interview, I mentioned that it is reasonable to think the rupee may not be overvalued.”

·       “We will take measures, if required, to curb speculation in the forex market.”

·       “Our forex reserves provide a sufficient buffer against external shocks.”

·       “We are confident of a much better balance of payments this year” due to the announced measures.

·       On exchange rate policy: RBI does not target any specific level or band but will curb excessive volatility and disorderly movements.”

· "It is reasonable to think the rupee may not be overvalued" (referring to earlier comments; clarified he did not call it undervalued, though some metrics suggest it).

· RBI will curb excessive volatility and prevent disorderly movements but does not target any specific level/band.

· "We will take measures, if required, to curb speculation in the forex market."

·       No measures to restrict capital outflows.

·       Confident of a much better Balance of Payments (BoP) this year due to announced measures.

·       Hopeful of reasonable and healthy dollar inflows; no specific target.

On New Measures (FCNR, ECBs, G-Secs, etc.)

·       Expect healthy flows from the package (FAR expansion, tax exemptions, concessional swaps, and hedging support).

·       PSUs are a special category; benefits of concessional forex swaps will pass on to society & the broader economy.

· Banks are expected to pass on hedging cost benefits to clients.

·       No target for NRI deposits.

Other Notable Comments

·       India’s macroeconomic situation remains stable and healthy; banks and corporates have strong balance sheets.

·       India is comparatively more resilient than others despite the oil shock.

·       Sufficient fertilizer stocks for the Kharif season.

·       The polymer currency notes proposal is under consideration (preliminary stage).

·       No proposal for any gold monetization scheme.

·       Upper-layer NBFC list to be updated shortly.

·       Other Notable Quotes

·       "The Indian economy entered this episode of global turbulence with much better fundamentals than in previous similar episodes.”

·       “Excluding precious metals, core inflation is projected to be lower, suggesting that demand pressures remain contained.”

The overall tone of RBI Governor Malhotra was a cautious/hawkish pause (hold)—prioritizing vigilance on inflation and external stability while supporting growth through liquidity and capital inflow measures. The governor reiterated that policy remains data-dependent.

Conclusions

RBI goes for a hawkish hold amid the concern of transitory, higher CPI inflation, some moderation in economic growth, and a largely stable employment/labor market. The RBI may continue to be in neutral (wait & watch) mode till at least December '26. Although the RBI and the government are taking various regulatory measures, including tax concessions to boost FPI/FDI inflows into the country, these are largely symptomatic & reactive in nature rather than addressing the core issues for the longer term.

India needs significant reform on the ground for ease of doing business, traveling, and living. India is a high-cost economy, from the extremely high cost of borrowings to taxes (GSTs, tariffs, various indirect taxes, and also direct taxes) in terms of return from the government, like free/universal quality education, healthcare, and infrastructure. India has had higher interest and taxation rates for the last several decades. This, along with extreme regulations and rampant corruption at government levels (administrations/bureaucrats and politicians/political parties—all are vying for a 20-40% cut of money), explains various reasons for the growing net outflow of FDIs.

Big Indian business houses, or HNIs, are now vying for external investments and permanent citizenship, while foreigners are shying away from/leaving India. Investors are facing various regulatory hurdles in India, including land, labor, and law. This, along with the high cost of living, weak labor market, and low real wage growth, overall discretionary consumer spending is weak, and thus private capex is still muted.

India’s so-called demographic dividend may now be turning into a demographic ‘cockroaches nightmare’ due to huge unemployment/underemployment, especially among educated urban youths. Huge government spending/fiscal stimulus by the government may be preventing the economy from an all-out visible recession at the cost of fiscal prudence and consistent devaluation of the LCU (INR). The INR is now looking like 'toilet paper. Ian's discretionary consumer spending is too dependent on unaccounted/corrupted/cut money and also on government employees to some extent, due to a huge/unreasonably high salary package compared to average Indians in the private sector. All these are making RBI’s monetary policies largely ineffective and inefficient. Overall, India’s economic productivity is much lower than the real GDP growth, resulting in higher headline inflation. Indian policymakers & politicians should focus on improving the overall productivity and quality of employment of the economy rather than being too obsessed with GDP growth numbers.

The Indian federal government is now paying around 45% of core tax revenue as interest on public debt, which is normally a sign of a bankrupt company/economy. India needs to reset completely from politics to economics. India needs to abandon the policy of vote banks & note banks, cut money/corruption, and ensure proper policies are in place to encourage private capex and quality jobs to improve the overall employment situation of the country and the productivity of the economy.

India’s core CPI (w/o food, beverages, fuel, and precious metals) continues to hover around 2.0% and is projected to be around 2.5% in FY27 on average in the worst-case scenario. The headline unemployment rate may be around 6.5% on average (official MOSPI/PLFS 5.5% + CMIE 7.5%), while actual under/unemployment (U6) may well be in mid-double digits (~25%), while the educated youth un/underemployment rate may be around 45%. Indian core real GDP (private consumption + private Capex) needs to grow at least 10.0% in real terms with higher economic productivity for maximum and inclusive employment. India also needs to focus on modern education from primary levels, with a focus on innovations (R&D) to compete with mighty China.

For all these, the RBI/government needs to keep the real positive rate at a true neutral level of +1.0% from the average/projected core CPI (w/o food, fuel, alcohols, and precious metals), which is now hovering around 2.0% and may hover around 2.5% in FY27. India’s core inflation is way below 4.0% targets by at least 200-150 bps, while the headline unemployment rate is around 6.5%, which needs to go down by around 200-250 bps to 4.5-4.0% levels. Thus, the RBI needs to cut or ensure a much lower rate around 3.50%-3.00% (1.0% real positive from core CPI) to bring inflation and employment back to target.

Bottom line ─ summary

Both the RBI and the government are making a primary policy mistake by keeping core real rates substantially higher at around 3.5-4.0%, along with a higher cost of energy and a higher cost of living. As a result of decades of economic & policy mismanagement, it’s little wonder that INR is fast becoming toilet paper. The natural devaluation rate may accelerate now to 5% and even 10%; USDINR may surge 25-50% by the next 10 years. This, along with potentially higher external borrowings as a result of FPI/GSECs' tax recalibration, means India may also face FX vulnerability in the coming years.

The short-term gain may turn into long-term pain if Indian policymakers and politicians fail to manage the currency and the economy properly. India needs to have proper policies in place to make the economy much more productive, innovative, and competitive to be a truly developed country by 2047-50; otherwise, it may continue to find itself under the fragile five types of narrative rather than the fastest five in a true sense (GDP/Capita).

The Indian economy has both structural and cyclical issues. The government has to fix both, rather than chest-thumping about the ‘world’s fastest-growing major economy.' The economy needs to publish proper core inflation data (w/o food, fuel, and precious metals) along with the employment situation of the country; otherwise, policymakers may continue to drive the economy in the dark without headlights. The Indian government and central bank rarely admit any deficiencies in the domestic economy. They always blame cyclical external shocks like the Iran war, the double blockade of the Strait of Hormuz, COVID, etc., and use these triggers as lame excuses for their economic mismanagement. If everything were so fine, then why does NIFTY EPS CAGR continue to hover around 10%, in line with nominal GDP growth?

Technical outlook: Gift Nifty and USDINR

Looking ahead, whatever may be the narrative, technically Gift Nifty Future (CMP: 23385) now has to sustain over 23550-850 for a rebound to 24150/24250-24400/24700* and 25050*/25500*-25800-26100/26500* in the coming days; otherwise, sustaining below 23500, Gift Nifty may fall to 23400/23300-23100/23300 and 23000/22750-22200*/22000 and 21800*/21500 in the coming days (base to worst-case scenario).

Similarly, USDINR (95.20) now has to sustain over 97.00 for a further rally to 100/105-107/110 in the coming days; otherwise, sustaining below 96.50-96.00, it may again fall to 94.50/94.00-93.00/92.50 in the coming days.