The RBI’s FX measures, announced last month, have helped stabilise the currency but a cost. The INR’s stability comes against a backdrop of dislocations in the forwards market, besides aggressive intervention bids, which have weighed on activity. Volumes have moderated, with importer demand remaining subdued while exporters have largely stayed on the sidelines. These, alongside the rechanneling of oil-related demand, have led to a fall in the demand for dollars. Notably, the surge in forward premia has cooled off slightly as the initial panic subsided but will return to early-Oct levels only when the restrictions are lifted. The RBI’s outstanding net short dollar position in the forwards market, meanwhile, jumped to a new high of $239bn in end-Sep26, partly attributable to the after-effects of the swap windows. A pullback in global oil prices also helped ease risk sentiments, although movements remain vulnerable to US mid-term election results. USDINR is expected to stay rangebound within 94.60-95.20 this week, much lower than recent high of 96.80. A durable and organic turnaround in the currency will require adverse global triggers to subside. Should FX depreciation pressures intensify again, markets are likely to price in a higher probability of a more front-loaded and aggressive rate hike at the December meeting. Separately, unconfirmed reports over a proposed a INR50 lakh sub-limit on certain Liberalised Remittance Scheme (LRS) purposes within the overall $250k cap have not received official confirmation.
Encouragingly, there were early signs of stabilisation in foreign interest into the equity market, with net inflows of $1.3bn recorded over the past week. Sentiment is likely to improve further if speculation that the securities regulator supports removing the LTCG tax on foreign investors comes to fruition. Industry groups have also called for a reduction in short-term tax rates and a rationalisation of the Securities Transaction Tax (STT). Investor participation is likely to strengthen if market participants are convinced that these measures will be durable rather than reversed once market sentiment stabilises. Tighter onshore liquidity and expectations over further policy tightening had driven yields higher across the curve in the last fortnight. 10Y yield retreated slightly from highs on lower oil, with the fiscal report for first half of FY27 (Apr-Sep) also being supportive at the margin. The 1HFY27 fiscal deficit stood at 42% of the full-year budget, leaving the government on track to meet its FY27 deficit target of 4.3% of GDP, supported by strong tax and non-tax revenues, including divestment proceeds, and RBI/PSU dividend transfers, the stabilisation buffer, and capex rationalisation. States, however, have adopted optimistic budget assumptions, particularly as revenue growth continues to lag expenditure. Notably, a series of state elections are due in the Jan-Mar27 quarter (4QFY27), which are likely to be preceded by a more expansionary fiscal push.
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