RBI has done almost everything markets wanted. So why is the Nifty flat? - Moneycontrol.com
Despite a sweeping package to attract dollar inflows and support the rupee, investors remain focused on crude oil and monsoon risks that could determine India's
Despite a sweeping package to attract dollar inflows and support the rupee, investors remain focused on crude oil and monsoon risks that could determine India's growth and inflation trajectory. Reserve Bank of India RBI, govt steps to steady rupee and boost capital inflows Caution persists amid oil prices and monsoon uncertainty Growth forecast lowered, inflation forecast raised by RBI Did our AI summary help? If there was one message from Friday's market action, it was this: the RBI and the government may have delivered a bazooka, but investors are not ready to celebrate. Foreign investors have been offered easier access to government bonds. Long-pending tax irritants have finally been addressed. Public sector companies have been incentivised to raise overseas borrowings. Banks have been encouraged to mobilise dollar deposits. Policymakers have effectively signalled that they are willing to use the capital account to defend macroeconomic stability rather than rely solely on interest rates. In normal circumstances, such a package would have triggered a relief rally. Instead, the Nifty was virtually unchanged. That tells us something important. The market believes policymakers have largely done everything within their control. What happens next depends on factors neither the RBI nor the government can influence. That factor is oil. The challenge facing India today is not one of liquidity or demand. The economy is dealing with a supply shock. The stock market does not want an environment where rising energy costs begin to depress demand. Nor does it want a weakening rupee at a time when India is already struggling to attract favourable global commentary thanks to the AI-trade and geopolitical situation. Viewed through this lens, Friday's measures are less about boosting markets and more about creating buffers. First, the package should help stem rupee weakness. The most important announcements arguably came outside the policy rate decision.
The RBI opened a concessional swap window for public-sector external commercial borrowings (ECBs), announced a similar facility for banks mobilising 3-5 year FCNR(B) deposits and relaxed rules for foreign investment into government securities. The government simultaneously sweetened the proposition through tax benefits on sovereign debt. Taken together, market participants estimate these measures could potentially attract $30-40 billion of foreign currency inflows over the coming months. More importantly, this is relatively sticky money. ECBs typically come with minimum maturities of three years, while FCNR(B) deposits mobilised under the scheme are likely to carry tenors of three to five years. Unlike portfolio flows, these are not the kind of funds that disappear overnight at the first sign of global volatility. This is certainly a very comforting message from policymakers. If the market is worried about rupee stability, the RBI is willing to use the capital account to bring dollars into the system rather than rely solely on intervention. This should help anchor expectations around the currency. Many bond-market participants now believe the rupee is unlikely to weaken materially beyond 97 per dollar unless crude prices spiral significantly higher. If geopolitical tensions ease and inflows materialise, some even see room for a move back towards 93-94. Will portfolio investors come in? But will foreign investors actually buy Indian bonds? That remains the unanswered question. The RBI has done a lot to make Indian government securities easier to own. The Fully Accessible Route has been expanded to include all new issuances of 15-year, 30-year and 40-year government securities. Limits on individual securities under the FPI general route have been removed. Most importantly, the government has finally addressed the long-standing issue of withholding tax on government bonds — something overseas investors have been seeking for years and policymakers had resisted for equally long.
Unfortunately, the arithmetic still doesn't favour India. The benchmark Indian government bond yields roughly 6.2%-6.3%. US Treasury yields are around 4.5%. After accounting for hedging costs of roughly 3%-3.5%, foreign investors are still looking at a negative carry of more than 1%. In other words, India has improved access and taxation, but it has not necessarily become an attractive fixed-income trade. Unless an investor has a strongly positive view on the rupee, many may still prefer to stay on the sidelines. And in the current geopolitical environment, that is not a bet everyone is willing to make. The growth story is resilient The RBI remains comfortable on growth. Perhaps the most reassuring aspect of the policy was that the central bank chose not to overreact. While acknowledging a more difficult external environment, the RBI's message remains that India's growth story is intact. The central bank revised its FY27 GDP growth forecast down to 6.6% from 6.9%, while raising its inflation forecast to 5.1% from 4.6%. Governor Sanjay Malhotra openly acknowledged the impact of higher crude prices, currency weakness and tensions in West Asia. Yet there was little indication of panic. The message was simple: growth may slow at the margin, inflation may rise at the margin, but neither is severe enough to warrant a drastic policy response. For equity markets, that is an important signal. The RBI is effectively saying that while the environment has become more challenging, it does not believe the economy is heading into a period of serious stress. The unknowlables Oil — and perhaps El Niño — remain the jokers in the pack. Which brings us back to why the Nifty barely reacted. Almost every forecast released on Friday depends on one assumption: crude oil. The Governor noted that the Indian crude basket has averaged significantly above the assumptions used in the April Monetary Policy Report, which had worked with an average oil price of around $85 per barrel.
Based on the RBI's revised growth and inflation forecasts, economists are already back-calculating an implicit crude assumption closer to $95 per barrel. That is manageable. What may not be manageable is a sustained move materially above those levels. Last couple of months the average price for Indian crude basket was $110/barrel. And oil is not the only variable policymakers cannot control. The possibility of an El Niño-related weather disruption is once again creeping into market conversations. If higher energy prices are accompanied by food inflation from a weaker or uneven monsoon, the RBI's inflation challenge becomes significantly more complicated. Food and fuel remain the two variables that matter most for household budgets and inflation expectations. If crude stabilises and the monsoon behaves, today's package could look remarkably effective. The rupee should remain stable, inflation should remain manageable and foreign capital should gradually become more comfortable with India. But if oil continues to climb and weather turns adverse, inflation, the current account deficit and the rupee could all come under renewed pressure, offsetting much of the benefit from today's measures. Which is why the market's reaction makes perfect sense. The RBI has done its bit. The government has done its bit. Now the market's fate lies with Brent and the monsoon. Also Read | India exempts foreign investors from taxes on G-Sec investments, issues ordinance Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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