June meeting of the RBI’s Monetary Policy Committee

 June meeting of the RBI’s Monetary Policy Committee 

was held against a challenging economic backdrop. 

• Inflationary pressures have been building up, 
• capital has been flowing out, 
•  rupee is under pressure,
• underlying growth momentum remains unpredictable. 

interest rates unchanged at 5.25 per cent 

The MPC, however, despite suggestions to the contrary, chose to keep interest rates unchanged at 5.25 per cent — rightly so — and also continued with the neutral stance. 

The continuing uncertainty over the conflict in West Asia and its spillover effects on growth and inflation call for a wait-and-watch approach.

On inflation

 

there is cause for concern. Headline retail inflation stood at 3.5 per cent in April. However, prices at the pump were raised in May. 

Price pressures are also being felt across various segments and the second-round effects of higher input costs will soon begin to show. 

The central bank has already raised its inflation forecast for the year to 5.1 per cent, up from the 4.6 per cent estimated in its April meeting.

 Food inflation is also a concern with a subnormal monsoon forecast and El Niño. 

projected GDP growth 

All this implies that inflation is edging upwards at a time when growth appears to be slowing down — the central bank has projected GDP growth at 6.6 per cent for the year, down from its earlier estimate of 6.9 per cent. There are also downside risks to growth.

government and the central bank announced several measures 

aimed at attracting foreign capital and easing pressure on the currency. 

The Centre has done away with the 

• capital gains tax on FII investments in government bonds, 
• 
  
• withholding tax on their interest income.
• 
  
•   RBI has expanded the universe of government securities that fall under the fully accessible route.

 These moves could affect 

demand for government securities and there are implications for bond yields. 

 concessional forex swap 

The central bank has also provided a concessional forex swap facility to incentivise external commercial borrowings,

 A concessional forex swap -  

is a special foreign exchange facility designed by a central bank (such as the Reserve Bank of India) to incentivize state-run companies to borrow funds overseas. 

By offering these swaps at subsidized rates, the central bank absorbs the currency hedging costs for these companies, ultimately driving foreign currency into the domestic market.

hedging cost to banks 

similar facility for bearing the hedging cost to banks for raising FCNR (B) deposits. 

foreign investors have taken out $28.6 billion 

All these are steps in the right direction. Considering that foreign investors have taken out $28.6 billion from equity markets so far this calendar year and net FDI stood at just $7.65 billion in 2025-26, measures are needed to attract foreign capital.