RBI Policy: Inflation Rises, Growth Cut; G-Sec Tax Relief

RBI Policy: Inflation Rises, Growth Cut; G-Sec Tax Relief | Quick Digest
India's RBI maintained its repo rate at 5.25% but raised the FY27 inflation forecast to 5.1% while cutting GDP growth to 6.6%, citing global risks. Concurrently, the government introduced a retrospective tax exemption on G-Secs for foreign investors.

Key Highlights

  • RBI keeps repo rate at 5.25% amidst global uncertainties.
  • FY27 inflation forecast increased to 5.1% due to crude and supply issues.
  • FY27 GDP growth projection revised down to 6.6% from 6.9%.
  • Government exempts FIIs from G-Sec income and capital gains tax.
  • Indian markets fluctuated, erasing initial gains after policy announcements.
  • Tax relief aims to attract foreign capital and deepen India's debt market.
On June 5, 2026, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) concluded its bi-monthly meeting, making several key announcements that impacted India's economic outlook and financial markets. The central bank unanimously decided to keep the benchmark repo rate unchanged at 5.25% for the second consecutive time in the current fiscal year, maintaining a 'neutral' policy stance. This decision was widely anticipated by economists, despite rising global uncertainties. However, the RBI revised its economic forecasts, signaling a more cautious outlook. The FY27 Consumer Price Inflation (CPI) forecast was significantly raised to 5.1%, a 50 basis point increase from the previous estimate of 4.6% in April. The quarterly projections for FY27 inflation stand at 4.2% in Q1, 5.1% in Q2, 5.9% in Q3, and 5.4% in Q4. This upward revision primarily stems from concerns over elevated crude oil prices, ongoing global supply chain disruptions, and potential risks from an uncertain southwest monsoon and El Niño conditions, all exacerbated by the conflict in West Asia. RBI Governor Sanjay Malhotra noted that while underlying inflationary pressures remain contained for now, higher prices could gradually spread across the economy. Conversely, the RBI trimmed its real GDP growth forecast for FY27 to 6.6% from its earlier projection of 6.9%. This downward adjustment also reflects the anticipated impact of the West Asia conflict, persistently high energy and other commodity prices, and continued supply disruptions weighing on economic activity. Quarterly GDP growth projections for FY27 are 6.6% in Q1, 6.3% in Q2, 6.5% in Q3, and 6.8% in Q4. Despite these challenges, the RBI noted that domestic economic activity has largely remained steady, supported by resilient private consumption, sustained fixed investment, and robust manufacturing and services PMIs. In a parallel significant development, the Indian government unveiled a crucial tax relief measure aimed at boosting foreign investment in its sovereign debt market. It promulgated the Income-tax (Amendment) Ordinance, 2026, which grants a retrospective tax exemption for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on income earned from government securities (G-Secs). This exemption covers both interest income and any capital gains arising from the sale, exchange, or transfer of these securities, effective retrospectively from April 1, 2026. This policy shift is intended to enhance the attractiveness of Indian government bonds for foreign investors, particularly after significant foreign capital outflows from equities earlier in the year due to geopolitical tensions. By aligning the tax treatment of Indian sovereign debt with international standards, the government seeks to deepen its domestic bond markets and attract stable, long-term foreign capital flows. The initial reaction in the Indian stock markets saw benchmark indices, Sensex and Nifty, trade higher immediately following the RBI's decision to keep the repo rate unchanged, with rate-sensitive sectors like banking and realty witnessing gains. The Sensex rose over 300 points, reclaiming the 74,500 mark, while the Nifty 50 traded near the 23,500 level. However, these gains proved fleeting, and the markets subsequently fluctuated, with both Sensex and Nifty eventually erasing their early advances and even dipping into negative territory. This fluctuation was attributed to factors such as profit-booking after the key event, along with specific stock movements like Wipro's decline and broader weakness in the Nifty IT sector. The Moneycontrol.com article titled "RBI has done almost everything markets wanted. So why is the Nifty flat?" provides context to this mixed market reaction, suggesting that while the rate hold was positive, the upward revision of inflation and growth concerns weighed on overall sentiment. Overall, the day's events highlight a complex economic environment for India, balancing domestic resilience against persistent global headwinds. The RBI's policy reflects a vigilant approach to inflation while acknowledging potential impacts on growth, complemented by government measures to enhance capital inflows.

Frequently Asked Questions

What were the key decisions made by the RBI in its June 2026 monetary policy meeting?

The RBI kept the repo rate unchanged at 5.25%. However, it raised the FY27 inflation forecast to 5.1% from 4.6% and cut the FY27 GDP growth forecast to 6.6% from 6.9%.

Why did the RBI revise its inflation and GDP forecasts?

The inflation forecast was raised due to higher crude oil prices, global supply chain disruptions, and potential risks from an uncertain monsoon and the West Asia conflict. The GDP forecast was cut due to the anticipated impact of the West Asia conflict, elevated energy prices, and continued supply disruptions.

What is the government's G-Sec tax relief, and who benefits from it?

The Indian government introduced a retrospective tax exemption for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on interest income and capital gains from government securities (G-Secs). This is effective from April 1, 2026.

How did the Indian stock market react to these announcements?

Initially, the Sensex and Nifty showed gains after the RBI kept rates unchanged. However, these gains were later erased, and the markets fluctuated, even dipping into negative territory, influenced by broader market factors and profit-booking.

What is the purpose of the government's G-Sec tax exemption for foreign investors?

The tax exemption aims to attract more foreign capital into India's debt market, deepen the sovereign bond market, and support the Indian rupee by increasing dollar inflows.

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