RBI does well to hold rates, shift focus to foreign capital

📌 Summary:

• Context: The June 2026 RBI Monetary Policy Committee (MPC) met amid building inflation, capital outflows, a pressured rupee and uncertain growth, with West Asia conflict spillovers
• Core argument: The MPC rightly kept the repo rate unchanged at 5.25% and retained the neutral stance — a wait-and-watch approach was warranted
• Inflation concern (causal chain): headline retail inflation was 3.5% in April, but (a) pump fuel prices were raised in May, (b) second-round effects of higher input costs are due, and (c) a subnormal monsoon plus El Niño threaten food inflation — RBI raised its FY inflation forecast to 5.1% (from 4.6% in April)
• Growth risk: RBI cut GDP growth projection to 6.6% (from 6.9%), with downside risks — inflation edging up even as growth slows (stagflation-like tension)
• Foreign-capital pivot (solutions): government scrapped capital gains tax on FII investment in government bonds and withholding tax on their interest income; RBI widened the basket of g-secs under the Fully Accessible Route (FAR)
• RBI also offered a concessional forex swap to incentivise external commercial borrowings (ECBs) and a hedging-cost facility for banks raising FCNR(B) deposits
• India's vulnerability (data): foreign investors pulled out $28.6 billion from equity markets so far this calendar year; net FDI was just $7.65 billion in 2025-26 — hence the urgency to attract foreign capital

🎯 UPSC Relevance: GS3 (monetary policy, inflation-growth trade-off, capital flows, BoP management, FII/FDI, currency stability)

📝 Prelims Facts:

• Repo rate held at 5.25%; stance: neutral
• RBI inflation forecast raised to 5.1%; GDP growth cut to 6.6%
• FAR = Fully Accessible Route for foreign investment in government securities
• FCNR(B) = Foreign Currency Non-Resident (Bank) deposits; ECB = External Commercial Borrowing

🔑 Key Term: Fully Accessible Route (FAR) — category of specified government securities in which non-residents can invest without any ceiling.