The overnight signs of a climbdown in Greenland-related tensions will provide relief to market sentiments and rupee volatility is likely to persist in the near term but depreciation is expected to be more gradual than the recent sharp moves, a report showed on Thursday.
The rupee rebounded from its all-time low levels to gain 15 paise at 91.50 against the US dollar in early trade on Thursday.
According to Radhika Rao, Executive Director and Senior Economist at DBS Bank, the bearish handover from last year was further fuelled by a confluence of global as well as domestic cues.
“A sharp rise in the global VIX reflected weakness across market indicators, not helped by unfavourable geopolitical developments and jump in global bond yields. In this context, overnight signs of a climbdown in Greenland-related tensions will provide relief to market sentiments,” she noted.
A momentous trade deal with the European Union is within reach (likely to be finalised next week), and some optimism has resurfaced over the US-trade trade negotiations after constructive remarks out of the World Economic Forum (WEF) meeting Davos.
Domestically, the downward pressure on the rupee comes at a time of apparent strength in economic growth, with the 1Q-2QFY average at 8 per cent (on-year) and “our forecast at above 7.5 per cent for FY26”.
A weak currency does cushion rupee earnings for exporters affected by higher tariffs but has caused distortions elsewhere.
“The annual CAD will still look manageable at close to -1.0-1.2 per cent of GDP, but capital flows have been the bigger bother. After net outflows in 2025, equity markets have witnessed $3 billion outflows this year, while bonds attracted tepid interest,” said the DBS Bank report.
Net FDI is faring better than last year but is still at a gap compared to gross FDI due to repatriation pressures.
“The fiscal impulse will be more apparent at the upcoming Budget, as cumulative general government borrowings are expected to rise in FY27,” it mentioned.
