By Suyash Choudhary, CIO – Fixed Income, Bandhan AMC.
Working The Source: Monetary Policy June 2026
The RBI / MPC kept policy rates and stance unchanged while flagging both upside risks to inflation and downside risks to growth. The uncertainty in assessment is understandable and expected, given the uncertainties from the West Asia conflict, as well as the evolving forecasts with respect to the south-west monsoon. The Governor in his statement was also quite clear in acknowledging that the risks of higher inflation have amplified and that the MPC “will continue to remain data-dependent and closely monitor the developments, including supply side pressures getting embedded in the general price level and inflation expectations.”. This also helps make another point: some rate hikes are likely going to be prudent given that average inflation will almost decidedly set higher. The quantum and timing are somewhat of a matter of judgement. The judgement taken today was to acknowledge evolving risks and standing by as needed.
The policy rate decision to us, however, was almost a matter of indifference for the time being. To elaborate, the view is that some rate hikes will be needed but only to adjust to the higher inflation outlook. Specifically, there is no case to us for using this as any sort of ‘currency defence’. Thus, the expectation is of a gradual 75 bps odd hike over a period of time. So long as RBI/MPC communication is clear in not letting market expectation overshoot the trajectory, it really doesn’t matter to the current level of market yields whether the repo rate is somewhat higher.
Instead, our entire market view framework has been around the funding stress stemming from the balance of payment (BoP) deficit that has been in play now for several quarters. In turn we had tracked this to three likely sources: 1> higher global rates 2> competing global capital allocation themes like AI 3> most recently, the West Asia conflict. The implication from the BoP pressure could be best summarised in the form of the “impossible trinity” framework which illustrates the tension between the external account, currency, and monetary policy. Thus, RBI’s policy rate setting basis domestic growth-inflation trade-off was no longer serving as anchor for market rates, even accounting for higher global rate volatility. Hence, if some stability could be reattained on the BoP, most market rates would once again look quite attractive irrespective of some likely tweaks ahead in the repo rate basis the evolving inflation outlook.
Working the Source
The set of announcements by RBI and government today make a significant downpayment towards alleviating stress on our BoP. The government has notified that foreign portfolio investor (FPI) investments in government securities will be exempt from income tax on any interest or capital gain. This is effective 1st April 2026. On its part the RBI has also unveiled meaningful measures including 1> expanding list of FAR securities to include new issuances of 15-, 30-, and 40-year government bonds. 2> concessional forex swap till 30th September 2026 to incentivize ECB by PSUs. 3> a similar facility for bearing the full hedging cost till 30th September 2026 to AD banks for raising fresh 3–5-year FCNR (B) deposits 4> restore the time for realisation of export proceeds to nine months.
Taken together, these are meaningful steps and stronger than market expectations. These should serve to put a floor on the BoP narrative, and one will look forward to some meaningful capital flows in the months ahead. This will also help to directly alleviate funding stress for banks. It will also make more likely inclusion of Indian government bonds in global indices. Equally important to us is the signalling effect: government and RBI are now actively working towards shoring up the BoP.
Given this, bond valuations look attractive to us, even after accounting for the fall in yields today. As discussed above, valuations weren’t being derived from fears of likely repo rate hikes but were more reflective of the BoP pressures. We had already turned overweight duration (refer: Positioning For The Binary: A Bond and Macro Update) and are now much more inclined to continue to carry this. If the tailwind created today were to be further augmented by cessation of war and some fatigue to the AI story, then the period of the bond benign environment can stretch for much further than currently envisaged. As always, however, this represents our view as of date and this may change going forward.