The rupee weakened above the 95/dollar level for the first time and ten-year bond yields hit the highest level since July 2024, despite the most aggressive defense of the currency by the central bank in more than a decade.
In fact, this calls into question the Reserve Bank of India’s “low for a long time” interest rate narrative as the new financial year is about to begin. There are no signs of softening in Brent crude oil prices. ₹$100/$100 is no longer a distant risk but an imminent reality.
The rupee opened 128 paise higher at 93.62 after the RBI issued a circular late on Friday night reducing overnight net open positions (NOP) by banks to just $100 million. The move was designed to prevent speculative bets against the local currency.
The relief lasted only for hours. The rupee lost all gains and touched an all-time low of 95.22 before closing at 94.78.
“The spot market movement shows that the RBI move on net open positions has not worked,” said Ashish Vaidya, head of treasury at DBS Bank Ltd in Mumbai. “Market liquidity has been impacted, and essentially the risk appetite of market makers is now significantly reduced.”
Rates and bonds in turmoil
The devastation in the currency market also affected fixed income. The 10-year benchmark bond yield rose 9 basis points to 7.0345%, its highest level since May 2024. For the month of March, yields jumped 37 basis points, the sharpest monthly rise since February 2017.
The derivatives market is indicating an even deeper crisis. Overnight index swaps (OIS) – a key gauge of interest rate expectations – saw record changes in:
One-year OIS: March ended 76 bps higher at 6.24%.
Two-year OIS: closed at 6.48%, its biggest monthly move so far.
“Swaps are already giving rise to rates by 50-100 basis points over the next one year,” said Alok Sharma, head of treasury at ICBC in Mumbai. He said the $70 per barrel oil assumption in the RBI’s October policy is now obsolete, requiring a “significant revision” in the central bank’s tone.
macro squeeze
For India, the world’s third-largest crude oil importer, the combination of a rising dollar and triple-digit oil prices poses a major threat to the current account deficit. The rupee has declined nearly 10% in the current fiscal year, making it the worst performer among emerging market peers.
“At the heart of this weakness is the global backdrop,” said Amit Pabari, managing director of CR Forex Advisors. “When uncertainty increases, markets naturally turn to safe assets, the dollar strengthens and emerging market currencies like the rupee weaken.”
There is disappointment in the equity markets. The S&P BSE Sensex plunged 1,635.67 points on Monday, while the NSE Nifty 50 slipped 2.1%. Foreign institutional investors are retreating by net selling ₹Equity traded worth Rs 4,367.30 crore ($460 million) on Friday alone.
Government defends fundamentals
Regardless of the market’s verdict, New Delhi is estimating stability. Finance Minister Nirmala Sitharaman on Monday said the country’s economic fundamentals remain strong and the rupee is “doing absolutely fine” compared to other emerging markets.
In a written reply to MPs, Minister of State for Finance Pankaj Chaudhary reiterated that the rupee is market-determined and foreign exchange reserves remain “comfortable”, enough to cover 11.2 months of imports.
However, economists warn that if the Middle East conflict intensifies, the cost of defending the currency could become prohibitively high.
“If the conflict escalates further, 100 per dollar is a scenario that the market will start to worry about and may even push the price higher,” said Krishna Bhimavarapu, APAC economist at State Street Investment Management.