The recent selloff in the rupee and government bonds points to waning signs of central
bank support, four bankers said, potentially exposing markets to
sharper swings spurred by the Middle East war.
Indian government bonds plunged on Monday, with the 10-year
yield jumping 15 basis points to the highest in more than a
year. The yield did not dip much a day later despite some
pullback in crude prices.
This is in contrast to the first three weeks of the Iran
war, when the benchmark yield rose only about 7 bps despite
surging oil prices.
The rupee, which hit a record low of nearly 94 per dollar on
Monday, recovered slightly on Tuesday but bankers worry about
further losses from a foreign exodus and demand in the
non-deliverable forward market.
Until last week, the currency had been holding around the
92.50 level with support from the Reserve Bank of India, but a
breach of that level has intensified depreciation pressure,
bankers said.
The RBI has scaled back intervention in the currency and
bond markets in recent sessions, said Mandar Pitale, head of
treasury at SBM Bank (India), adding that the central bank has
already deployed $16 billion-18 billion this month.
India’s foreign exchange pile eased over $19 billion to
$709.76 billion as on March 13, according to latest data.
RBI HELP PETERS OUT
To be sure, the RBI has played a significant role in
supporting the rupee and bonds amid a broader risk-off shock
triggered by the Iran conflict, which has driven a surge in oil
prices.
Since the conflict began on February 28, the RBI has
purchased 1.77 trillion rupees ($18.9 billion) of bonds through
March 13, the latest date for which official data is available.
Buying from an investor category that includes the central
bank has also dropped since then, data from the clearing house
shows.
In the FX markets, the central bank has intervened across
spot, forwards and non-deliverable forwards, according to
bankers.
However, over the past three sessions, the RBI has adopted a
more passive approach to FX intervention, a banker at a
state-run bank said, selling on the interbank system to absorb
dollar demand and marking a shift from past efforts to defend
specific levels, he added. The banker requested anonymity as he
is not authorised to speak to the media.
There is a shift in the fundamental view about the economy’s
growth-inflation-current account mix, which warrants rupee
weakness, said Dhiraj Nim, economist and FX strategist at ANZ.
“The scale of the shock is large, which means burning FX
reserves to defend any particular level of the exchange rate may
not be prudent. Higher yields are also the natural market
outcomes in such a scenario.”
Published on March 24, 2026