India Markets Set to Rebound as RBI Holds Rates, Rupee Stabilizes

Radhika Rao, Senior Economist and Executive Director at DBS Bank, predicted that the RBI will keep rates on hold in 2026, while addressing specific pockets of strain.

The bar for rate hikes is high, due to the "stagflationary" shock and exogenous nature of the event risk, the report said.

"Foreign reserve coverage ratios are at a healthy level, providing sufficient firepower to the authorities, with signs of regular intervention presence in spot and forwards," the bank said in a note.

Banking system liquidity returned to a modest deficit amid advance tax outflows and strong foreign‑exchange intervention.

The Reserve Bank of India (RBI) infused Rs 793 billion via an overnight Variable Rate Repo (VRR) auction and announced plans for a three‑day auction worth Rs 1 trillion.

More such auctions are likely if defence against rupee weakness continues, the report said.

Rupee bond yield might cool off slightly after the immediate reprieve, with 10‑year yield to settle within 6.70-6.78 per cent, while INR settles around 92.80-93.50, according to Rao.

"As markets whiplash, a durable improvement in sentiment will require indications that a reopening of the Strait of Hormuz is imminent, which will help energy prices stabilise, in the absence of which gains could be tentative," the bank said.

Markets saw a sharp rise in India's risk barometer VIX this week, and over 2.5 per cent drop in benchmark equities, a record low rupee and a jump in bond yield.

India being a net importer of oil and other energy commodities, faces the twin headwinds of a wider current account gap and weak capital inflows, in the face of high prices and delayed supplies.

Meanwhile, petroleum dealers associations has assured people that there is no shortage of fuel, and adequate stock is available with HPCL, IOCL and BPCL.

- IANS