Key facts
- The Reserve Bank of India maintained its benchmark repo rate at 5.25%.
- India's GDP growth forecast was lowered to 6.6%.
- India's inflation projection was raised to 5.1%.
- Capital gains tax for foreign bondholders was removed to support the rupee.
- The Indian rupee strengthened by 0.9% against the US dollar, closing at 94.9450.
- Forward premiums for the Indian rupee fell to their lowest level this financial year.
- India's foreign exchange reserves increased by over $900 million to $682.3 billion for the week ended May 29.
- Foreign currency assets rose $3.116 billion to $546.148 billion.
- Gold reserves saw a decline.
- India denied selling $12 billion in gold to support the rupee.
The Reserve Bank of India (RBI) has decided to hold its benchmark repo rate steady at 5.25%, opting against an interest rate hike despite pressures from a depreciating rupee and inflation risks. This decision comes as the central bank also revised its economic outlook, lowering the Gross Domestic Product (GDP) growth forecast to 6.6% while simultaneously raising the inflation projection to 5.1%. To bolster the rupee, which has hit record lows due to rising oil prices linked to Middle East tensions, the RBI has introduced several measures. Among these is the significant step of scrapping capital gains tax for foreign bondholders, aiming to attract foreign investment into Indian debt markets.
In parallel developments, the Indian rupee experienced a notable strengthening, gaining 0.9% against the US dollar to close at 94.9450. This marks the largest daily gain for the rupee since April 2, and forward premiums have fallen to their lowest point in the current financial year. The RBI has officially denied recent reports suggesting that it had sold $12 billion worth of gold reserves to support the rupee. Official data, conversely, indicates an increase in the RBI's gold holdings. India's overall foreign exchange reserves saw an increase of over $900 million, reaching $682.3 billion for the week ending May 29. This rise was primarily driven by an increase in foreign currency assets, which grew by $3.116 billion to $546.148 billion, although gold reserves did experience a decline during the same period.
Globally, the US dollar index has slipped from a two-month high, influenced by growing optimism for a ceasefire in Lebanon. Meanwhile, the Japanese yen is hovering near the 160 per dollar level. Strong US services inflation data has reinforced expectations that the Federal Reserve will maintain its current interest rates. In contrast, the Bank of Japan has signaled a potential interest rate hike in June, indicating divergent monetary policy paths among major economies.