Forex Measures Give INR Temporary Lifeline; HSBC Warns Sustainability Hinges on Lower Oil Prices

Forex Measures Give INR Temporary Lifeline; HSBC Warns Sustainability Hinges on Lower Oil Prices​

RBI’s FX Toolkit Provides Short-Term Relief, but Structural Changes are Key​

HSBC has assessed the Reserve Bank of India's (RBI) recent policy meeting as a decisive 'split decision.' The central bank adopted an aggressive stance using its foreign exchange (FX) toolkit to stabilize the external sector. Simultaneously, the RBI maintained a more restrained posture regarding interest rates.

The measures introduced by the RBI aim to attract inflows and strengthen the currency amid ongoing global headwinds. These actions could improve India's Balance of Payments balance by over USD 30 billion in the short term. This influx is considered sufficient to keep India within HSBC’s "safe zone" under its FX reserves adequacy framework.

The central bank has expanded the Fully Accessible Route (FAR) to include 15-, 30-, and 40-year Government Securities (G-secs). These instruments now have no investment limits, signaling market deepening steps. Additionally, exporter repatriation timelines have been shortened from 15 months to nine months.

Interest Rate Stance and Forward Guidance from HSBC​

On the monetary policy front, the RBI kept the repo rate unchanged at 5.25%, which aligns with HSBC’s expectations. However, the central bank significantly raised its inflation forecast.

In response to this inflationary signal, HSBC has adjusted its outlook on rate hikes. The firm now anticipates two 25 basis point increases in August and October. This is an acceleration from earlier projections of 4Q26 and 1Q27.

Joey Chew, Head of Asia FX Research at HSBC, provided a nuanced view on the rupee's near-term outlook. While acknowledging immediate relief, noting that the USD-INR fell by around 0.8% post-announcement, he cautioned against overconfidence.

Structural Initiatives to Bolster Capital Flows and Markets​

The RBI introduced several structural measures aimed at attracting foreign investment and deepening domestic markets. It is executing cheaper forex swaps to encourage Public Sector Undertakings (PSUs) to raise External Commercial Borrowings (ECBs).

Further incentives include a reduction in the long-term capital gains tax to 12.5% and the withholding tax on interest income for Foreign Institutional Investors (FIIs) investments in government bonds, which was previously at 20%.

The RBI also provided a subsidized window for fresh 3-5 year NRI deposits. For this specific period, the central bank will bear the full hedging cost for banks until September 2026. These measures are designed to directly impact the exchange rate over time, boosting bond inflows.

HSBC: Sustainable INR Recovery Needs Lower Oil Prices and Less Stronger USD​

Despite the positive FX interventions, HSBC maintains that the current package is primarily "buying time." Sustaining any meaningful recovery in both the Indian Rupee (INR) and G-secs remains contingent upon lower oil prices.

HSBC's long-term forecast for the USD-INR is set at 95.5. This view aligns with the firm’s GDP analysis, which cautions that FY27 growth could moderate to around 6%. The energy shocks are identified as the persistent pressure the current FX measures are attempting to mitigate.

Joey Chew highlighted potential "payback" risks associated with the economy down the line. These include managing the maturing short FX forwards and the process of rebuilding reserves.

Crucially, HSBC noted structural differences that distinguish the current situation from past events. The country’s FX reserves are now significantly larger. Furthermore, the RBI holds a substantial short FX forward position, estimated at around $100 billion.