Read the latest bond and forex market signals right
Rising bond yields and a depreciating currency. The two noteworthy features that characterized the macro scenario of India’s economy last week are two sides of the same coin. Both reflect underlying market scepticism about the soundness of our macro fundamentals. Lower demand for bonds results in lower prices and higher yields.
At the same time, to the extent this is the result of reduced interest from overseas buyers, it results in reduced dollar inflows, leading to a depreciation of the rupee vis-à-vis the dollar. It is easy to dismiss this as just another example of the contrariness of free market forces. After all, we have just recorded the fastest GDP growth of the past five quarters, at 7.8% for the April-June 2025 period. Retail inflation is at an eight-year low of 1.55% (in July) and the current account deficit is within manageable limits.
Granted, the first quarter’s robust growth was for a period before the US hiked its tariffs to 50% on 27 August. But the global rating agency Standard & Poor’s has just upgraded India’s rating and even pessimistic estimates place GDP growth for 2025-26 at no less than 6%. All reason enough to disregard unsettling signals from the bond and foreign exchange markets?
On the face of it, yes. Except that these markets are known to be forward-looking. Could they be trying to tell us something beyond the headline numbers that we must pay heed to? Much as we would like to cheer our sound macro stability today, might the future outlook not be so bright?
A sea-change in the world trading order in the wake of America’s tariff war against friend and foe alike, combined with absurdly high tariffs on our shipments to the US, is bound to impact economic growth, both global and domestic.
Markets know that.
Reflecting this new reality, bond market yields have risen while the rupee has already fallen a little over 3% this year, touching a fresh all-time low of 88.36 to the dollar on Friday as nervous foreign portfolio investors pulled out money from the stock market and fresh flows dwindled.
For now, the Reserve Bank of India (RBI) has intervened very little, content perhaps to let the rupee weaken in favour of exports now that the US has raised its market barriers.
This is in line with RBI’s long-stated position that its interventions in the forex market do not aim to peg the rupee’s dollar exchange rate at any specific level, but are guided by the need to prevent unwarranted volatility that could destabilize our markets.
No doubt, the size of its forex kitty—above $690 billion as on 22 August—also gives RBI confidence that it can sell dollars if need be to prevent a drastic slide in India’s currency. Nonetheless, we should heed warning signals from the bond and forex markets and prepare for the possibility that the tide may turn against us.
After Prime Minister Narendra Modi promised an ‘arsenal’ of reforms, finance minister Nirmala Sitharaman fired the first salvo with a sharp reset of GST last Thursday.
Welcome as this reformist move is, further reforms of sundry regulations and legal provisions, with markets for land, labour and farm output finally tackled, could be combined with fiscal prudence—and a baton shift at some point to private investment—to give our largely self-driven economy the ballast needed to ride out the tariff storm that has kept global investors edgy. For best outcomes, we must read the market signals right.
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