The local currency came under clear pressure as sustained foreign institutional investor (FII) outflows combined with uncertainty over an India‑US trade deal. Investors pushed money out of local markets, while unclear trade terms kept sentiment fragile, leaving the currency vulnerable to further swings.
Why FII outflows hit the currency
FIIs move large sums in and out of markets. When they sell local stocks and bonds en masse, demand for foreign currency rises to repatriate funds. That puts downward pressure on the home currency. Key effects include:
- Reduced capital inflows that normally support the currency.
- Higher volatility as markets search for buyers.
- Tighter liquidity in local bond and equity markets, which can push yields higher and weigh on growth expectations.
How trade deal uncertainty compounds the problem
Negotiations with a major trading partner influence investor confidence. Ambiguity over the scope, timing, or benefits of an India‑US trade pact creates two risks:
- Short‑term: Investors avoid exposure until terms are clear, amplifying outflows.
- Medium‑term: Potential changes to tariffs or market access can alter trade balances and capital flows.
Together, these risks keep foreign portfolio investors cautious and make the currency more sensitive to global news.
Market implications
As FIIs pull back and trade clarity stalls, expect:
- Rupee or local currency depreciation pressure.
- Wider moves in equity indices and bond yields as foreign flows ebb and local investors reassess risk.
- Increased focus on central bank statements and government responses.
What investors and policymakers will watch
- Flow data: FII buying/selling trends and daily capital movement reports.
- Trade talks updates: Any progress or concrete deals that reduce uncertainty.
- Policy actions: Central bank interventions, forex reserves use, or fiscal measures to stabilize markets.
In the near term, currency direction will hinge on whether foreign investors regain confidence and whether trade negotiations produce clarity. Clear signals from policymakers or positive trade developments could ease pressure, while prolonged ambiguity may keep volatility elevated.