India\u2019s external accounts came under pressure as weakening capital flows, softer foreign portfolio inflows and a narrower net foreign direct investment position helped push the balance of payments into deficit in FY26, alongside moderation in offshore borrowings. Early FY27 saw sizeable equity outflows, although there was some recovery in foreign portfolio investment debt and FDI. In response, the Reserve Bank of India and the government introduced a set of measures in June 2026 aimed at shoring up inflows and supporting the capital account.<\/p>\n\n
Policy settings were also adjusted as inflation concerns were framed more around geopolitics than the monsoon. A previously expected rate rise for FY27 was removed, while the end-year forecast for the 10-year yield was set at 6.9%. Fiscal policy was projected to loosen slightly in FY27, with higher subsidies and slower revenue growth expected to leave a modestly wider fiscal deficit.<\/p>\n\n
Given the Reserve Bank of India is no longer expected to hike rates, we see a clear opportunity in interest rate futures. The forecast for a downside in the 10-year bond yield suggests its price will rise, making buying futures on the 10-year Government of India bond an attractive strategy. Yields have already retreated from recent highs above 7.2% to around 7.05% in late June, indicating the market is already pricing in this shift.<\/p>\n\n
This dovish pivot from the central bank is also a strong tailwind for equities. Historically, Indian markets perform well when the monetary tightening cycle pauses, as seen in late 2018 which preceded a significant market rally. We should therefore consider buying Nifty 50 call options or futures contracts to position for an anticipated upward move in the coming weeks.<\/p>\n\n
For the currency, the government and RBI’s actions are explicitly designed to support the Indian Rupee and attract inflows. This reduces the probability of a sharp depreciation against the US dollar. We believe selling out-of-the-money USD\/INR call options is a prudent way to earn premium, as data shows one-month implied volatility has already fallen from over 6.5% to below 5% following the policy announcements.<\/p>\n\n
The expected weakness in capital flows and a slightly wider fiscal deficit remain concerns, but they are now secondary to the central bank’s supportive stance. These factors may limit the upside in equities and bonds but are unlikely to reverse the positive trend established by the change in monetary policy. We will monitor FPI flows closely, which have shown a nascent recovery with a net debt inflow of nearly $1.5 billion in the last two weeks of June.<\/p>\n\n\n\n