RBI's capital-flow push could bring in $80 billion, help cushion external risks: Axis MF

The Reserve Bank of India's (RBI) latest measures to attract foreign capital could bring in as much as $75-80 billion and help offset growing pressures on the country's external account, according to Axis Mutual Fund.

"The RBI's policy outcome was broadly in line with our expectations—no change in rates, retention of a neutral stance and an attempt to attract foreign capital," Axis Mutual Fund said in its assessment.

The assessment comes after the RBI on Friday kept the repo rate unchanged at 5.25% and retained its neutral policy stance, while unveiling a series of steps aimed at improving the attractiveness of Indian debt and financial markets for overseas investors.

Furthermore, the government's decision to exempt foreign institutional investors from capital gains tax and withholding tax on interest income from government securities has further strengthened the package, according to the fund house.

External-sector concerns drive policy response

According to Axis MF, India's current account deficit, which had remained below 1% of GDP, is expected to widen towards 2% of GDP in FY27 due to a higher oil import bill and softer export momentum. The fund house estimates this could translate into a balance of payments deficit of $50-65 billion, increasing the need for sustained foreign capital inflows.

To bolster inflows, the RBI announced concessional forex swap facilities for external commercial borrowings (ECBs), extended support for FCNR(B) deposits, expanded the Fully Accessible Route (FAR) for government securities and eased investment norms for non-resident investors. It also restored the export proceeds realisation timeline to nine months. Separately, the government exempted foreign institutional investors from capital gains tax and withholding tax on interest income from investments in government securities.

Axis MF estimates that these measures could attract $20-25 billion through a potential inclusion of Indian bonds in Bloomberg's Global Aggregate Bond Index, around $25 billion via ECB borrowings and another $30-50 billion through FCNR(B) deposits.

Growth slows, inflation outlook hardens

The policy comes against a backdrop of a weakening global environment marked by elevated commodity prices, energy market volatility and geopolitical tensions. Reflecting these concerns, the RBI has lowered its FY27 GDP growth projection to 6.6% from 6.9% earlier, while raising its inflation forecast to 5.1% from 4.6%.

"The RBI's approach to attracting capital inflows is both timely and appropriate. We expect these measures to collectively support inflows of up to $75-80 billion," Axis MF said in a statement.

Financial markets reacted positively to the measures. Government bond yields eased by 5-7 basis points after the announcement, while short-term corporate bond yields fell by 10-15 basis points.