The Reserve Bank of India set out measures at its 5 June 2026 policy meeting aimed at supporting the Indian rupee, including full subsidisation of FX hedging costs for banks raising fresh 3–5 year FCNR(B) deposits and a concessional FX swap facility to encourage state-owned enterprises to raise ECBs. Separately, the government removed taxes on capital gains and interest on government securities for foreign investors, with the change applied retrospectively from 1 April 2026, and it also expanded the range of eligible government bonds.
MUFG estimates these steps could generate around US$40bn of inflows, with scope for more should India gain entry to the Bloomberg Global Aggregate Index. On that basis, it revised its rupee path to a firmer near-term profile, projecting USD/INR at 94.00 by the September quarter before moving back towards 96.00 in the next calendar year. The bank also expects INR yields to continue edging higher.
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Near-Term Outlook: Rupee Strength and Market Responses
Given the new policies from the Reserve Bank of India, we believe the Indian Rupee is set for near-term strength. These measures, aimed at boosting capital inflows, have fundamentally shifted our outlook. We are now positioning for the USD/INR exchange rate to decline in the coming weeks.
Recent market data already supports this view, with the rupee appreciating from 95.10 to 94.75 against the dollar in the two trading sessions since the announcement. Foreign portfolio investors have also responded swiftly, pouring a net $5.2 billion into Indian government debt since June 5th, according to clearing house data. This initial surge in demand reinforces our confidence in the policy’s effectiveness.
For derivative traders, this suggests selling near-term USD call options or buying USD put options with expirations around August and September. These strategies would capitalize on the expected move towards the 94.00 level. The CBOE/NSE Rupee Volatility Index has also fallen 15% since the measures were unveiled, which may make selling options premium an attractive strategy.
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Historical Context and Medium-Term Forecasts
This situation reminds us of 2013, when a similar RBI swap window for FCNR(B) deposits successfully attracted over $30 billion and stabilized the rupee during the “taper tantrum”. The current package of measures appears even more comprehensive. We anticipate the projected $40 billion in inflows is a realistic target given this historical precedent and the removal of capital gains taxes for foreign investors.
However, we should remain mindful that the forecast sees a rebound in USD/INR towards 96.00 next year. Therefore, while we are positioning for short-term rupee strength, we should be cautious about extending these bearish USD/INR bets beyond the September quarter. It may be prudent to consider longer-dated structures that would benefit from a reversal in the rupee’s fortunes in 2027.
