The Indian rupee and government bonds are set to be steered this week by the geopolitical ripples following the recent militant attack in Kashmir, according to market participants.
India has blamed Pakistani elements for the April 22 assault that killed 26 people in a meadow near Pahalgam, a claim Islamabad has strongly denied. In response, the two nuclear-armed neighbors have rolled out retaliatory measures—India has put a critical river-sharing treaty on hold, while Pakistan has shut its airspace to Indian airlines—stoking fears of renewed conflict that rattled financial markets last week.
On Friday, the rupee fluctuated between 85.09 and 85.65 per U.S. dollar before closing at 85.45, while equity benchmarks fell between 0.7% and 0.9%. Meanwhile, the yield on the 10-year benchmark bond climbed four basis points to settle at 6.3645%.
"The rupee’s near-term band looks to be 85.00 to 85.70 for now, but any major geopolitical developments could quickly shift that," said Kunal Kurani, Assistant Vice President at Mecklai Financial.
Currency markets will also keep an eye on developments around U.S.-China trade relations. Any thawing of tensions could bolster the dollar, while setbacks would likely weigh on it.
Bond traders expect India's 10-year yield to range between 6.30% and 6.40% this week, though a spike in India-Pakistan tensions could push it higher. Yields have generally been trending lower amid hopes of further rate cuts and the central bank’s efforts to maintain liquidity.
The Reserve Bank of India plans to purchase 200 billion rupees worth of government bonds this week, adding to nearly 3.7 trillion rupees it has already bought in the first four months of 2025. ICICI Securities Primary Dealership noted that a June rate cut now seems almost certain unless a major global disruption hits emerging market currencies like the rupee.
Rates on India’s overnight index swaps (OIS) are also poised to react to political developments this week. While one-year, two-year, and five-year swap rates ended mostly stable last week, they saw sharp swings earlier, having dropped between 23 and 31 basis points through most of April.