The Reserve Bank of India has barred banks from offering INR non-deliverable forwards (NDFs) to resident and non-resident clients, aiming to reduce speculative pressure on the rupee. The measure targets FX positioning by banks and other financial institutions.<\/p>\n
Rupee pressure is linked to foreign portfolio investment (FPI) outflows, oil-price shock effects and slowing domestic growth. Indian bonds weakened, with the 10-year Indian government bond yield up 3bp to 7.07%, and market pricing pointing towards 7.20\u20137.25%.<\/p>\n
FPI demand for FAR-route government bonds fell to \u20b935.46bn ($380m) in FY26, from \u20b92.31tn ($24.7bn) in FY25. March recorded \u20b9176.86bn ($1.9bn) of FPI debt outflows, alongside concerns about oil-driven fiscal risks and a narrower Indian government bond\u2013US Treasury spread.<\/p>\n
Markets are monitoring whether the RBI shifts towards a more hawkish stance as early as next week, amid reassessment of risks linked to the Middle East conflict. The piece was produced using an AI tool and reviewed by an editor, within a selection compiled by the FXStreet Insights Team.<\/p>\n
The RBI\u2019s move to curb rupee speculation by barring banks from NDF markets is seen as a temporary fix. We believe the real pressures on the currency are structural. These headwinds are tied to ongoing foreign portfolio outflows, the shock from high oil prices, and a slowdown in domestic growth.<\/p>\n
The shift in foreign investment is clear when we look at the numbers from last fiscal year. In FY25, index inclusion drove a massive \u20b92.31 trillion of FPI demand for government bonds, but this has collapsed to just \u20b935.46 billion so far in FY26. March alone saw debt outflows of \u20b9176.86 billion, a trend that has continued as Brent crude prices remain firm above $95 a barrel, fueling concerns over the government’s budget.<\/p>\n
This lack of foreign demand is pushing bond yields higher, with the 10-year yield now above 7.07%. We are positioning for this move to extend towards the 7.20-7.25% range in the coming weeks. Traders should consider paying fixed rates in overnight index swaps to hedge against, or profit from, a potential hawkish pivot from the central bank.<\/p>\n
For currency derivatives, the outlook suggests further rupee weakness. With fundamental pressures mounting, traders could look at buying USD\/INR call options. This strategy provides exposure to a rising dollar against the rupee while defining the maximum risk involved.<\/p>\n
The market is increasingly worried that the RBI may be forced into a more hawkish policy stance as soon as its next meeting. The ongoing conflict in the Middle East is a key driver, forcing a rethink of inflation and policy risks. We saw a similar dynamic in 2022 when a spike in oil prices forced central banks globally to tighten policy aggressively.<\/p>\n","protected":false},"excerpt":{"rendered":"
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