The rupee's best single-day gain globally on Friday was the headline. The far more significant story is what produced it and what it signals about what comes next. The RBI's June 5 policy meeting doubled as a currency defence operation. Governor Sanjay Malhotra announced five measures to attract foreign capital even as he held the repo rate steady. Taken alongside a sweeping set of fiscal moves from the government, this is not a one-off intervention. It looks like the opening of a broader campaign.
That said, markets have not exactly cheered. The BSE Sensex ended Friday 116 points lower, capping a second straight week of losses. The RBI simultaneously raised its inflation projection and trimmed its growth forecast for the year. The rupee's recovery notwithstanding, investors are not yet convinced that the macroeconomic headwinds have eased. That scepticism is understandable, but it may be focused on the wrong signals.
The government's decision to grant a retrospective tax exemption to FIIs on G-Sec income and capital gains was the primary catalyst for Friday's currency move. The fact that this came via an ordinance is worth noting. It signals urgency, not desperation. By removing the tax friction on sovereign debt with retrospective effect, the government has addressed a long-standing grievance among global fund managers and done so at a moment when waiting for Parliament was not an option.
The more consequential, and more overlooked, move was on the PROI front. Individual Persons Resident Outside India can now hold up to 10% in a listed Indian company, up from the earlier 5%, while the aggregate cap for all PROIs has been raised to 24%. Early commentary has reached for comparisons with the 2013 NRI bonds. That parallel does not hold. Those were expensive, high-yield debt instruments deployed to stop the bleeding during the taper tantrum. They were time-bound, transactional and aimed squarely at the diaspora.
The PROI expansion is different in nature. By widening the definition beyond NRIs and OCIs to any individual resident outside India, the policy opens the door to a broader global investor pool. It also channels foreign participation into equity rather than debt, which means longer-duration, ownership-linked capital rather than yield-driven flows that can reverse at the first sign of trouble.
The RBI's accompanying measures—expanding the FAR route to 15-, 30- and 40-year G-Secs, removing FPI concentration limits, providing FCNR(B) hedging support, and offering a concessional swap window for PSU external borrowings—point to a degree of coordination between North Block and Mint Road that is not routine.
Between April 1 and June 2, FPIs pulled out a net $13.4 billion from equities and $0.3 billion from debt. Reversing that will take more than a good Friday. It will require sustained macroeconomic stability, a credible inflation trajectory and some relief on oil prices. None of those is assured. But the direction of policy is now clear, and there is little reason to think the government has exhausted its options. Expect more.
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