The currency and bond markets capped FY26 on a despairing note on Monday. The rupee breached 95 for the first time and the 10-year benchmark bond yield topped 7% for the first time since June 2024, mirroring the year’s turbulent performance.
The Reserve Bank of India (RBI) proposal to tighten forex position limits from April 10 saw the rupee rising to 93.47 before it fell back to 95.12 and closed at 94.83 — another new low — despite interventions. But that was the story for the entire year due to external shocks starting from the US President’s Donald Trump’s tariff tantrums to the Middle East crisis now, which saw record outflows from foreign portfolio investors.
The RBI did step in many times to curb volatility but the currency kept on slipping. The rupee plunged 10.96% in FY26—its sharpest drop in 14 years—making it Asia’s worst-performing currency. The rupee fell 4.24% in March alone following the war. Currently, the markets are driven by elevated oil prices, which rose to $ 105 per barrel compared to the $ 70 level earlier in the year.
Dealers said that importers seized the opportunity to lock in dollars at those levels, causing the rupee to pare its gains. “While NOP-driven unwinding adds dollar supply, high oil prices rebuild structural demand. If crude stays elevated or spikes on disruptions, rupee fundamentals could overpower RBI’s technical relief—offering only temporary support, not sustained appreciation,” Kunal Sodhani, treasury head at Shinhan Bank.
On March 27, the RBI made a bold move, directing banks to cap their net open rupee positions in the onshore deliverable forex market at $100 million by each business day’s end and mandated compliance by April 10. Existing norms allow banks to set net open position (NOP) limits at up to 25% of their total capital.
Sodhani further said that the FY26 depreciation is not a single-factor story—it is a perfect storm of external shocks, capital outflows, structural vulnerabilities. “Elevated US rates and a firm dollar index kept EM currencies under pressure. From March, the rupee was led by oil prices.” FPIs offloaded equities worth $ 19.7 billion in FY26.
The trajectory of the rupee will depend on external factors, oil prices and foreign flows, said market participants. “The rupee remains weak until oil drops to $80, and Strait of Hormuz opens up. If the war concludes, rupee may rise to 92.5. Next year might see milder depreciation if conditions normalise and may hover around 96-97 levels.
However, extended conflict risks pushing it toward 100,” said Anil Kumar Bhansali, head of treasury. Finrex Treasury Advisors LLP. Meanwhile, the yield on the 10-year benchmark bond ended at 7.04% on Monday. During the year, it rose 45 bps despite a 125 bps rate cut.
In March alone, yields surged by 38 bps, pricing rate hikes due to inflation worries from higher oil prices. Besides global headwinds, weak demand-supply also played on the market, along with large issuances from states. “The government has taken constructive steps, such as cutting gross borrowing below budget estimates. However, rising global yields have weighed on domestic market, with rising fiscal cost impinging on transmission,” said Sameer Narang, chief economist at ICICI Bank.
The RBI has taken measures for effective monetary transmission via injection of durable liquidity. However, with Middle East events unfolding, there is little that can be done about it apart from minimising impact on economy. Aside from the global events, Narang expects demand for G-Secs from banks to go up along with the possibility of index inclusion, which would have improved the demand-supply balance. He added that attractive yields now should draw even more interest if the conflict settles soon enough.
According to Vishal Goenka, co-founder of IndiaBonds, oil price impact due to ongoing war will likely have a longer-term impact on India’s macroeconomic conditions. “The RBI is likely to hike rates in FY27 by 50-75bps. However, we should see a flattening of the yield curve with short-end interest rates moving more than longer-end.”