Treasury and bond markets are expected to remain cautious heading into next week, with attention on defence spending and global currency trends.
The Indian rupee edged up on May 9 after sliding nearly 1% a day earlier after tensions escalated along the border. In early trade today, the currency dropped 30 paise to 85.88
against the US dollar, with traders anticipating more pressure if the geopolitical situation worsens.
Gambhir said the rupee’s movement depends on both global currency strength and local tensions. “So far, we haven’t seen any major intervention from the Reserve Bank of India (RBI).”
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The dollar index has also strengthened, crossing the 100 mark for the first time since April 10. This comes after the signing of a US–UK trade agreement, which has boosted confidence in the dollar.
Bond markets have also shown some reaction. Yields have risen by nearly 10 basis points (bps) over the past few days. According to Gambhir, “Markets are edgy. The outcome of today’s weekly bond auction will also matter for yields going forward.”
Madhavi Arora, Chief Economist at Emkay Global Financial Services, says it is too early to estimate the macro economic impact of the war. “Defence spending may rise, possibly by 0.2–0.3% of gross domestic product (GDP), based on past patterns. But we are not expecting a big change in fiscal deficit or capex at this point.”
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Inflation is not seen as a near-term concern. “We expect headline inflation to be around 3.8% for the year. Central banks are likely to watch global trends more closely than domestic ones,” Arora said.
Global currency dynamics may continue to influence Indian markets. Gambhir referred to speculation about a possible shift in US policy. There’s talk of a ‘Mar-a-Lago Accord’ idea, where the US may encourage other countries to support a weaker dollar. While it’s not official, the strength in currencies like the Taiwan dollar may be linked to that, he said.
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