India moves to support rupee as GDP growth quickens in FY26

India’s economy grew 7.7% in the fiscal year through March, faster than the government had estimated three months earlier, giving policymakers a stronger growth backdrop as they moved to support a rupee pressured by costly oil and foreign equity outflows.

Growth picked up from 7.1% a year earlier and beat the government’s February estimate of 7.6%. Gross Domestic Product (GDP) expanded 7.8% in the January-to-March quarter, above a Reuters poll forecast of 7.2%, while gross value added rose 7.9%.

The figures were released by the Ministry of Statistics and Programme Implementation on Friday, the same day the government and the Reserve Bank of India (RBI) announced measures to draw more foreign capital into the country and ease pressure on the currency.

The rupee has weakened more than 5% this year and touched record lows past 96 to the dollar in May, hurt by elevated crude prices, uncertainty from the Middle East conflict and net foreign portfolio withdrawals from Indian equities.

NSDL-based data show foreign investors pulled ₹2.25 trillion, or roughly $24 billion to $26 billion, from Indian equities in 2026 through May, more than the ₹1.66 trillion withdrawn in all of 2025.

The central bank moved first. The Monetary Policy Committee voted unanimously to keep the repo rate unchanged at 5.25% and retained its neutral stance, declining to raise borrowing costs even as the rupee remained under pressure.

RBI governor Sanjay Malhotra said the committee judged it “prudent to wait for greater clarity to emerge,” while warning that second-round inflation effects required vigilance.

The RBI cut its growth forecast for 2026-27 to 6.6% from 6.9% and raised its inflation projection to 5.1% from 4.6%, with prices expected to move from about 4.2% early in the year toward 5.9% by the third quarter.

The higher inflation path, set against a weak currency, narrows the case for the rate cuts markets had expected earlier in the year and leaves the central bank leaning on other tools to support the rupee.

The sharper fiscal move came from the government. Through the Income-tax (Amendment) Ordinance, 2026, it exempted foreign institutional investors (FIIs) and the Bank for International Settlements from tax on interest income and capital gains arising from government securities.

The exemption applies retrospectively from 1 April 2026. Until now, foreign investors were subject to a 20% withholding tax on interest from government bonds and 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months.

Because Parliament was not in session, the change was made by ordinance under Article 123 of the Constitution, signed by President Droupadi Murmu and written into the income-tax law.

The aim is to draw a steadier class of foreign capital into Indian debt, including investors that buy long-dated bonds and hold them. Such inflows can bring in dollars to support the rupee and help the government finance a budget deficit targeted at 4.3% of GDP at lower yields.

The move reverses a position New Delhi had defended for years. As recently as 2022, India had resisted waiving taxes to ease the inclusion of its bonds in global indexes, wary that volatile inflows could add financial-market risk.

Removing the tax now also strengthens India’s case for inclusion in the Bloomberg Global Aggregate Index, a far larger benchmark than the emerging-market gauges it already sits in, with a review due this month.

The RBI’s other measures were designed to reinforce that push. It expanded the Fully Accessible Route to include new 15-year, 30-year and 40-year government securities, removed short-term, concentration and single-security limits for foreign portfolio investors on the general route, and eased rules for overseas individuals investing in listed Indian companies.

It also offered concessional foreign-exchange swaps until 30 September for overseas borrowings by state-run firms and said it would compensate banks for hedging costs on three-year and five-year foreign-currency non-resident deposits, both aimed at encouraging dollar inflows.

Together with the trade deals India has signed, Malhotra said, the steps would make for a “much better BOP” this year than the alternative.

Markets gave a mixed verdict. The rupee posted its strongest single-session gain in two months, while the 10-year bond yield fell after the RBI’s inflow measures.

Equities surrendered early gains, with the Sensex closing 117 points lower at 74,243 and the Nifty 50 down 50 points at 23,367, as investors weighed currency-support measures against weaker growth forecasts and higher inflation risks.

State-run banks and real-estate stocks firmed, while technology and metal shares fell.

Gold and silver futures retreated alongside other risk assets, with gold down about 0.8% and silver more than 1.8%.

Brent crude eased on the day but stayed elevated in the mid-$90s, with supply fears around the Strait of Hormuz intact.

The Middle East conflict underlies the policy turn. Elevated crude prices and fears of disruption to Gulf oil flows have threatened to raise India’s import bill, widen its external deficit and revive inflation pressures just as foreign investors have been pulling money from domestic equities.

India imports most of its crude oil, making a sustained price rise one of the fastest routes to wider deficits, imported inflation and renewed currency pressure.

Economists read the day as a coordinated defense rather than a turning point.

Radhika Rao of DBS Bank called the rate decision a “hawkish pause,” reading the RBI’s move as an attempt to anchor inflation expectations and steady the rupee while preserving policy flexibility.

Neelkanth Mishra, the economist recently appointed India’s Executive Director at the World Bank, described the currency market as being “in a state of panic” in remarks to ANI.

He said India’s balance-of-payments deficit on an accrual basis was about $24 billion between October 2025 and March 2026, against RBI intervention of about $75 billion over the same period.

Rajeev Juneja of the PHD Chamber of Commerce and Industry said strong domestic demand had kept the economy resilient even as geopolitics clouded the year ahead.

The growth figure is the one the government prefers to cite, and it has credited public investment, income tax relief and lower goods and services tax rates for keeping demand firm. That momentum now has to carry into a year the central bank expects to slow to 6.6%, even as policymakers try to defend the currency without choking the expansion.