DBS Group Research economist Radhika Rao discusses India’s response to persistent Middle East tensions and high energy prices, focusing on the Rupee and local markets. The Reserve Bank of India (RBI) has revised its foreign exchange playbook to limit Net Open Position in INR, while the Rupee briefly rallied before weakening below 95/USD. Bond yields and OIS rates have risen on fiscal and policy concerns.

RBI tightens FX rules as INR weakens

"To complement its FX intervention efforts aimed at curbing the rupee’s depreciation, the RBI revised its foreign exchange playbook by imposing a mandatory daily limit of $100 million on Authorised Dealers’ Net Open Position (NOP-INR) in the local deliverable market, replacing the earlier cap of 25% of Tier 1 capital. Effective April 10, this measure is aimed at curbing excessive positioning in the currency market."

"In a knee-jerk reaction, the INR rallied sharply to the upper-93 levels on expectations that arbitrage flows would weaken under the new directive and that offshore–onshore curves would diverge. However, INR gains proved to be short-lived, with rupee weakening to a new low, below 95/USD, as high energy prices continued to pose a risk to external balances and financial market stability."

"Onshore markets are closed on Tuesday to mark the fiscal year end, after a volatile start to the week. Besides a weak rupee, the benchmark 10Y bond yield rose to 7% for the first time since mid-2024, due to the impending fiscal burden, steady supply of states’ issuances and elevated global yields."

"Overnight index swap (OIS) rates also rose sharply, as investors factored in the risk of a tighter policy stance. In FY27, despite the denominator effect from the nominal GDP growth rate (higher inflation), prevailing fiscal costs and likelihood of higher allocations towards fertiliser subsidies pose small upside risks to the full year deficit projection."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)