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India's financial markets are undergoing a significant shift in trading dynamics amid escalating global war-related risks, with the rupee breaching key levels and bond yields hardening, according to a report by Union Bank of India (UBI).
The report noted that the last trading session of FY26 marked a "regime shift" across currency and rates markets, with the rupee breaching the Rs 95 per dollar mark for the first time and the 10-year government bond yield moving above the 7 per cent threshold. On an annual basis, the rupee depreciated nearly 10 per cent in FY26, while the benchmark bond yield rose by 45 basis points despite a 100 basis point rate cut by the Monetary Policy Committee during April-December 2025, indicating tightening financial conditions. UBI said the rupee is acting as a "shock absorber" amid war-driven external pressures, but added that the burden of adjustment is likely to be shared, with markets showing increasing tolerance for higher interest rates in the coming months. The Reserve Bank of India (RBI) has also stepped in with regulatory measures to stabilise the currency, including capping banks' net open position in the rupee at USD 100 million in onshore forward markets. The move is aimed at curbing speculative and arbitrage trades that have been amplifying volatility. However, despite these measures, pressure on the rupee persists due to elevated crude oil prices and global risk aversion linked to geopolitical tensions, the report said. UBI indicated that policymakers may increasingly turn to unconventional and macro-prudential tools, drawing parallels with the 2013 "taper tantrum" period when the RBI deployed a mix of liquidity tightening, rate measures and regulatory interventions to stabilise the currency. Among the short-term measures suggested are a special dollar swap window for oil marketing companies, curbs on gold imports, and revival of FCNR deposit schemes to attract foreign currency inflows. Over the medium term, the report emphasised the need to promote rupee-based trade settlement, strengthen foreign exchange swap lines with major economies, monitor rising FDI outflows, and encourage oil price hedging to reduce vulnerability to external shocks. The report also highlighted that the RBI infused nearly Rs 15 lakh crore of liquidity during FY26 through measures such as CRR cuts, open market operations and forex swaps, underscoring the scale of policy response to stabilise markets. Despite adequate foreign exchange reserves, UBI cautioned that conserving buffers and deploying targeted measures would be critical amid continued uncertainty in global markets. (ANI)
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