The year 2025-26 (FY26) marked the rupee’s worst year since 2011-12 as the Indian currency fell 9.85 per cent due to foreign investment outflows with the West Asia war in March adding to the woes.
In March, the Indian unit depreciated a little over 4 per cent against the US dollar and breached 95/$ on the last trading day.
Following intervention by the Reserve Bank of India (RBI), it closed at 94.81.
Yields on government bonds hardened in FY26 despite 100 basis points (bps) reduction in the policy repo rate due to higher supplies from states, among others.
The yield of the 10-year benchmark government bond ended FY26 at 7.04 per cent — it’s highest since July 2024.
Market participants said foreign direct investments (FDIs) as well as portfolio outflows weighed on both the rupee and bonds during the year.
At the same time, higher borrowings by states kept supply elevated, limiting any softening in yields and pushing them higher.
The currency’s weakness was initially driven by capital outflows but was later compounded by global developments, including tariff-related tensions and escalation of the Iran war.
At present, a significant part of the rise in yields and the rupee’s depreciation can be attributed to the Iran war, with its impact unlikely to fade, said market participants.
“In the current financial year, the highlights were largely driven by FDI outflows, which affected bond and rupee both. Then, larger borrowings from states were a constraint on the yields. It was a major factor for yields going up,” said the treasury head at a private bank.
“Rupee’s depreciation was compounded first by Trump’s tariffs and secondly, the Iran crisis,” he added.
Bond yields, which were expected to ease to around 6.8-6.85 per cent during the year, instead hardened beyond the 7 per cent mark as global uncertainties intensified.
The view on both bonds and the rupee remains cautious in the near term, with limited capital inflows amid a stronger dollar environment.
Supply-side pressures also persisted, with sizeable government borrowing alongside state development loans (SDLs) weighing on the market.
“We were expecting somewhere like 6.8-6.85 per cent, but this war was completely unexpected and pushed yields beyond 7 per cent. The view on both rupee and bonds remains bearish for now, primarily because of uncertainty surrounding emerging markets,” said Aditya Vyas, chief economist at STCI Primary Dealers.
The monetary policy started the cut interest rates from February last year with the repo rate cumulatively reduced by 125 bps so far.
In June, the repo rate was cut by 50 bps changing the stance to neutral.
The change in stance triggered end of cut cycle plays in the bond market, leading bond yields to rise through the year.
Despite interventions such as open market operations (OMO) and liquidity measures to stabilise markets and support the rupee, yields continued to trend higher and recently broke out of their earlier range amid global uncertainty.
“Despite RBI interventions (OMO purchases and liquidity measures) to inject liquidity and stabilise markets, yields continue to trade range-bound at higher levels before breaking out to close around 7 per cent as global uncertainties put pressure on balance of payments and inflation, said Abhishek Upadhyay, chief economist, I-SEC Primary Dealership.
