When USD Index DXY fell from 110 to 95 (by ~13.5%) USD/INR rallied from 84 to 97 (by ~15.5%) and on DXY recovery from 95 to 103 (by ~8.5%) USD/INR into back & forth mode at 94-97, thanks only to spending >$75B of hard earned FC reserves (preventing run away beyond 100)! It’s obvious from the above that there’s serious concerns over macroeconomic fundamentals & issues over asset valuation (adjusted for tax & currency depreciation)! That would need retaining hawkish monetary policy stance till end of FY27 if not beyond (if Brent stays sticky >$100 and FPIs continue to stay aside seeking better entry value)! What should have been done in H2/2025 is being done in H2/2026; hope it gets better from hereon!

It’s ridiculous to see 1M FX yield ~11.5% from spiking FX premium to ~7.5% and 1Y FX yield up at ~8.5% translating to yield curve of 11.5-8.5% across 1-12M as against the corresponding 1-12M MM yield curve of 6-6.35% building an arbitrage of 5.5-2.15%! This kind of inefficiency between FX & MM yield curve (not seen for many years) will squeeze funds available for borrowers as banks will make better NII by parking money in the nostro accounts (export of domestic capital)! Foreign banks pumped USD to domestic banks (for leverage funding against 3-5Y FCNR deposits) which now goes back to them (parked in the nostro accounts of domestic banks). This should ideally trigger the next round of rate hike with a larger dose before 4th December, the next policy action date. Unfortunately @RBI can’t do B/S swaps when Rupee is already flushed in the system! Bad scene, but it’s good to keep USD/INR below 95.50 (at the cost of rising 3-12M borrowing cost for Indian borrowers)! The worst impact is on the importer borrower, getting hit from both sides; paying high premium to hedge imports & paying more for short term rupee funds! When financial stability goes for a toss, how can price stability be achieved across asset classes?

Another mystery is from “free run” on leverage; most banks providing over 1:10 leverage with 0.75-1.0% spread between deposit rate (at >6%) and loan rate (at <5.5%); either RBI should have fixed a cap at 5X or bank’s board should have fixed a tolerance limit aligned to absorbing capacity of excess liquidity & management of liquidity till deployed profitability! It ended up as mad rush (as if there’s no tomorrow!); banks chasing NRIs and NRIs chasing domestic banks & offshore leverage providers! A costly lesson for the future!

@RBI had 2 options: 1. 50 bps hike + neutral stance 2. Pause + hawkish stance The first option would have pushed back USD/INR to 95-96.50 while the second option would have pushed Rupee down further towards 98.50-100! MPC discovered the 3rd option : 25 bps hike + calibrated tightening, which is neither here nor there resulting in USD/INR stability at 96.50-97.50 (aided by $ sales from RBI). While the policy statement ruled out rate cuts in the near term (aligned to the stance), waiting for another 2 months for the next (baby steps) 25 bps hike didn’t turn up as “cheers” to the stakeholders in general & Rupee bulls in particular! “Is the baby-step approach prudent when dynamics turn disruptive” is the debate? What about banking stocks? Bank Nifty has outperformed Nifty significantly staying far away from 2026 low 49954 and losing ~7.5% in 2026 against 2025 close 59581. While the hold around midpoint of 2026 low & high provides comfort, the worry is from the m2m impact on HFT/AFS book and squeezing margin on HTM book from rising funding cost. All taken, rest of 2026 will neither be bullish nor bearish while retaining the marginal drift down mode awaiting what Trump is up to (in SoH) post the midterm elections in the US! Will he send the Brent Crude crashing down to $65-80 or create havoc taking the focus beyond $115? It’s very low probability of seeing USD/INR above 98.50-100 and 10Y yield above 7.35-7.50%; both combined should extend support for Nifty index at lows of 2024-2025 (21137-21743)! It’s turbulence weather; keep the seat belt fastened at all times till soft landing!