The Reserve Bank of India has stopped banks from offering INR non-deliverable forwards (NDFs) to resident and non-resident clients. The move aims to reduce speculative trading against the rupee.
The rupee is still facing pressures linked to foreign portfolio investor (FPI) outflows, oil-shock conditions, and slower domestic growth. These factors are presented as longer-term drivers rather than speculation alone.
Indian government bonds continued to weaken, with the 10-year yield up 3 basis points to 7.07%. Market positioning points to yields moving towards 7.20–7.25%, alongside reduced FPI demand.
In FY26, FPI purchases of FAR-route government bonds fell to ₹35.46bn ($380m) from ₹2.31tn ($24.7bn) in FY25. In March, FPI debt outflows totalled ₹176.86bn ($1.9bn), with oil-shock fears linked to fiscal concerns and a narrower IGB–UST spread.
Markets are also pricing a higher chance of a shift in policy stance, potentially as early as next week. The Middle East conflict is cited as a factor affecting policy risk assessments.
The RBI’s move to bar banks from offering INR NDFs is being viewed as a temporary measure that doesn’t address the core issues. We see the real headwinds for the rupee as structural, stemming from persistent foreign outflows and the effects of an oil price shock. These factors, combined with slowing domestic growth, are creating sustained pressure on the currency.
The shift in foreign sentiment is clear from the numbers for the fiscal years. We saw Foreign Portfolio Investor (FPI) demand for government bonds collapse to just ₹35.46 billion in the new fiscal year, a stark contrast to the ₹2.31 trillion inflow last year (FY25) when index inclusion was the main driver. March alone saw debt outflows of ₹176.86 billion as oil fears spooked the market.
With Brent crude now trading above $102 a barrel, concerns about India’s import bill and potential fiscal slippage are intensifying. This pressure is reflected in the currency markets, where the rupee has weakened to trade around 84.50 against the dollar. The fundamental outlook suggests this weakness may continue in the near term.
In the bond market, we’ve seen the 10-year yield creep up towards 7.07% as FPI appetite has all but vanished. Traders are now positioning for this trend to continue, with yields expected to reach the 7.20–7.25% range. This implies that shorting bond futures could be a viable strategy to hedge against or profit from falling bond prices.
Markets are now increasingly focused on the central bank’s next move, which could come as early as next week. With recent CPI data showing inflation stubbornly high at 5.8%, there is a growing expectation that the RBI may adopt a more hawkish stance to combat imported inflation. This anticipation is likely to increase volatility, making options strategies more relevant.
Given these dynamics, traders should consider positioning for further rupee depreciation. Buying USD/INR call options or long futures contracts offers a way to capitalize on the ongoing structural weakness. These positions would also serve as a hedge against the combination of high oil prices and continued FPI selling.
