📰India Bond Rally Slows, RBI Scales Back Short Dollar Forwards, Indian Stocks Losing Momentum?

Good afternoon, 

Welcome to the best way to stay up-to-date on India’s financial markets. Today, we’re discussing

• India’s sovereign bond rally has slowed sharply,

• India’s central bank has pared back its short dollar positions in the derivatives market for a third consecutive month,

• and India’s stock market is showing signs of fatigue.

Then, we close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update.

India Bond Rally Slows.

India’s sovereign bond rally has slowed sharply, with foreign inflows cooling after an initial $20 billion surge following JPMorgan’s decision to add Indian debt to its emerging market index. That figure, while significant, remains at the lower end of analyst expectations. With FTSE Russell set to begin including Indian bonds in its own EM gauge this September, investors are now weighing whether recent reforms and macro trends are enough to reignite enthusiasm.

Despite a global “Sell America” rotation that pushed emerging market debt to record highs—Bloomberg’s EM local currency bond index hit a peak in June—India has underperformed. Its 10-year bond yields dropped around 50 basis points earlier this year, but gains have since plateaued. Second-quarter returns in dollar terms were just 2 percent, compared to 5 percent for the broader EM benchmark. The rupee’s lackluster performance—flat against the dollar while the Taiwan dollar and Korean won surged—has further eroded investor appetite.

Analysts point to the RBI’s pivot to a neutral policy stance, modest FX returns, and structural barriers like India’s high capital gains and interest income taxes. Foreign ownership still accounts for just 3 percent of India’s $1.3 trillion bond market, well below China’s 5.8 percent, signaling both untapped potential—and persistent hurdles.

RBI Scales Back Short Dollar Forwards.

India’s central bank has pared back its short dollar positions in the derivatives market for a third consecutive month, signaling a calibrated approach to managing foreign exchange risks under Governor Sanjay Malhotra. The Reserve Bank of India’s net short book in the forwards market stood at $65.2 billion (₹5.6 trillion) as of May, down from $72.6 billion (₹6.2 trillion) in April and a record $88.8 billion (₹7.6 trillion) in February.

A short dollar position means the RBI has agreed to sell U.S. dollars in the future, often to offset large inflows of foreign currency and prevent the rupee from appreciating too quickly. By cutting this position from a record $88.8 billion in February to $65.2 billion in May, the RBI appears to be signaling more confidence in the rupee's stability and a more measured approach to intervening in currency markets. This shift suggests the central bank is trying to avoid excessive volatility in the rupee while also keeping its FX toolkit flexible amid changing global conditions.

Data show that the bulk of dollar repayments, about $30 billion (₹2.6 trillion), now fall in the three-month to one-year bucket, with an additional $20.1 billion (₹1.7 trillion) due beyond one year. This extended maturity provides breathing space for the central bank as it navigates global currency fluctuations and domestic liquidity needs.

Market watchers note that the RBI’s cautious drawdown reflects its intent to limit foreign exchange vulnerabilities while keeping overall system liquidity stable. “The RBI reduced the short dollar forward positions in May in line with the trends observed in the recent months,” said Kanika Pasricha, chief economic adviser at Union Bank of India.

Despite the drag from maturing forwards, the RBI remains unperturbed, buoyed by foreign exchange reserves that have rebounded to nearly $700 billion (₹60.1 trillion) amid renewed dollar weakness and steady purchases. Governor Malhotra has reiterated that building reserves will remain opportunistic rather than a cause for undue concern.

The move underscores a subtle but clear recalibration of India’s FX toolkit, with the central bank stepping back from last year’s heavy offshore interventions that helped shield the rupee. For now, the focus remains on maintaining flexibility and liquidity while safeguarding external stability.

Indian Stocks Losing Momentum?

After serving as a safe haven during April’s global trade turmoil, India’s $5.4 trillion (₹463.4 trillion) stock market is showing signs of fatigue, with investors re-evaluating their exposure amid high valuations and a murky earnings outlook.

The MSCI India Index has underperformed the broader MSCI Asia Pacific Index by nearly six percentage points so far this year, trailing behind a strong rebound in Hong Kong-listed Chinese shares. The shift reflects global investors’ appetite for markets with clearer growth catalysts, such as the artificial intelligence boom that continues to lift Chinese equities.

“This is not the year for India,” said Amol Gogate, emerging markets fund manager at Carmignac. He added that earnings momentum is slowing, and the valuation premium is hard to justify compared with peers like China or South Korea. Indeed, the MSCI India Index trades at nearly 23 times forward earnings, one of the highest multiples globally and well above its five-year average.

Foreign funds have pulled close to $9 billion (₹772.3 billion) from Indian equities this year, putting the market on track for a rare consecutive annual outflow, Bloomberg data show. Sentiment has also weakened across asset classes, with the rupee under pressure and overseas holdings of Indian bonds declining by $3.4 billion (₹291.8 billion) since April.

Still, long-term bulls remain undeterred, pointing to India’s status as the world’s fastest-growing major economy and its vast domestic market. “We still believe in the long-term growth potential of India and usually take dips as buying opportunities for Indian stocks,” said Joohee An of Mirae Asset Global Investments. But for now, many portfolio managers appear content to wait on the sidelines, watching whether India’s pricey equities can deliver the earnings growth needed to keep global capital anchored.

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Gupshup.

Macro

• India is set to receive above-normal rainfall in July, boosting sowing prospects for key crops like rice, soybeans, and corn. Strong monsoon rains are expected to support rural incomes and economic growth, with this season likely to exceed 106 percent of the long-term average.

• India’s bond rally has cooled ahead of its next global index inclusion, as recent outflows and a weak rupee offset earlier foreign inflows. While some investors remain optimistic about India’s resilient economy and fiscal discipline, more reforms are seen as key to attracting steady, long-term foreign investment.

• Stocks closed out a strong quarter at record highs on optimism over US trade talks and expectations of Fed rate cuts. The S&P 500’s rally was driven by tech giants like Nvidia and Oracle, while easing Middle East tensions and progress with key trading partners supported broader market gains.

• India’s banks are expected to keep their gross bad loan ratios near multi-decade lows, provided economic growth stays steady, the RBI said in its latest report. Strong recoveries, write-offs, and improved capital buffers have helped banks maintain asset quality, with the bad loan ratio seen at just 2.5 percent by March 2027.

• Moody’s says India’s new rules easing provisions for loans to under-construction infrastructure projects will help revive credit growth in the sector. By lowering provisioning requirements, the RBI aims to boost banks’ confidence in funding projects, supporting medium-term lending despite some short-term impact on profitability.

Equities

• Delhi-based developer Anant Raj plans to invest $2.1 billion (₹180.2 billion) in expanding its data center capacity to over 300 megawatts by 2032. The move comes as India’s booming digital economy and data localization drive rapid growth, with data centers expected to make up over 40 percent of the firm’s revenue in four years.

• India’s Sona Comstar plans to start domestic production of rare earth magnets used in EVs, aiming to reduce reliance on Chinese imports. The move follows China’s export curbs and aligns with India’s push to boost local manufacturing of these critical components.

Alts

• Torrent Pharmaceuticals has secured a credit line of up to $2.3 billion (₹197.4 billion) from global banks to help fund its acquisition of JB Chemicals. The financing, backed by lenders like Barclays and HSBC, highlights growing cross-border deal activity in India’s pharma sector.

• Greenko Energy’s founders have signed a $650 million (₹55.8 billion) private credit deal to buy back most of Orix Corp.’s stake, boosting their control by 17.5 percent. As part of the agreement, Orix will retain a small stake and invest $731 million (₹62.7 billion) in a convertible note issued by Greenko’s parent company.

• Adani Ports and Special Economic Zone is planning to raise about $351 million (₹30.1 billion) through long-term rupee bonds in the coming months. This would bring the unit’s total borrowings to over $1 billion (₹85.8 trillion) since May, as it seeks to benefit from India’s expanding trade growth.

Policy

• Global banks are expected to urge India’s central bank to ease its proposed requirement for reporting offshore interest-rate derivative trades, citing confidentiality and jurisdictional concerns. Lenders may suggest sharing aggregated data or using offshore trade repositories instead, as offshore swap volumes continue to surge.

• With just days before Trump’s country-specific tariffs resume, the White House is likely to announce only limited trade deals instead of sweeping reforms. While agreements with key partners are expected, uncertainty and mixed signals over tariffs have left global markets and allies on edge about the president’s next moves.

• India’s trade team has extended its stay in Washington as talks with the US pick up pace ahead of a July 9 tariff deadline. The two sides are pushing for an interim deal but remain divided on key issues like market access for genetically modified crops and reciprocal tariffs.

• President Trump said he doesn’t expect to extend the July 9 trade deadline for countries to secure deals and avoid higher tariffs. While talks with multiple partners are ongoing, Treasury Secretary Scott Bessent hinted some deals may not be finalized in time, leaving open the chance for delays.

• A draft bill in India’s tech hub, Karnataka, proposes jail terms of up to seven years for spreading “fake news,” raising free speech concerns. Activists warn that the strict new law could enable selective enforcement and censorship in a country already grappling with misinformation risks.

See you Tuesday.

Written by Eshaan Chanda & Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.