With tensions in the Middle East showing little sign of easing, governments across the region have taken steps to contain spillover risks. In this context, India’s authorities have made two key announcements since late last week. 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 (press release). 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.
Late last week, the government reduced the central excise duty on petrol and diesel by INR 10/litre to support state-owned oil marketing companies (OMCs), which were absorbing losses from elevated global energy prices. This move lowered the need for an imminent increase in the retail pump prices to defend consumers but will entail a fiscal cost worth ~INR1.7trn (0.4-0.5% of GDP) in foregone revenues if this lasts the full year. Export taxes on diesel and ATF was introduced, but no windfall tax has been levied on producers yet. Despite this move, elevated global prices and a weakening rupee suggest that the strain on fiscal books will persist, signaling that a further reduction in duties or a fuel price increase is likely to be the next step. Back in 2022, in the wake of the Russia–Ukraine conflict, a combination of duty cuts and pump price adjustments was undertaken to share the burden, with some degree of demand destruction also occurring as a result.
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. With geopolitical tensions spilling over into the new fiscal year in India, we will assess our baseline economic forecasts in an upcoming note. 
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