Rate Cut Meets Falling Rupee: India’s Markets Enter a New Tug-of-War

India’s financial markets have entered a phase defined by conflicting forces, as the Reserve Bank of India’s latest monetary policy move intersects with a sharply sliding rupee. The RBI’s 25-basis-point repo rate cut to 5.25%, along with a clear growth-first stance, highlights one dominant theme: policymakers are prepared to use liquidity support and rate easing aggressively to protect domestic growth momentum.

However, even as policy support strengthens, markets are facing a new tug-of-war. A weakening currency, unresolved trade tensions with the US, and a fragile global environment have created macroeconomic crosscurrents that investors must navigate carefully.

RBI Prioritizes Growth: A Strong Policy Signal

The central bank’s dovish move does more than just cut rates. It sends a strong message that both the RBI and the government are aligned in reviving and sustaining economic momentum. By choosing to place growth at the centre of its framework, the RBI is signalling that it will not hesitate to act decisively if demand weakens.

Alongside the rate cut, the central bank also announced a liquidity boost through open-market operations and planned USD/INR swaps. Based on its updated baseline estimates:

• FY26 GDP growth is pegged at 7.3%

• CPI inflation is projected at 2%

This combination — strong growth expectations with low inflation — offers a rare “Goldilocks” scenario that can help stabilize consumer demand, credit activity and corporate earnings. For equities, this backdrop supports a compelling case for an earnings revival across segments such as banks, consumption-oriented companies and industrials.

Rupee Weakness: Attractive Valuation, But Anxiety Persists

Even as the rate cut supports growth, the currency picture presents a contrasting narrative. The rupee’s steep depreciation, which has now breached the ₹90 per US dollar mark, has pushed the currency into what many global strategists consider “undervalued territory.”

In theory, an undervalued rupee increases the attractiveness of Indian equities for foreign institutional investors (FIIs), since lower currency levels can enhance future return potential. Historically, periods of undervaluation have preceded phases of foreign inflows.

But today’s environment is different. The rapid decline of the rupee, combined with unresolved trade tensions with the US and no formal agreement in sight, has created unease over macro stability. For global investors already grappling with geopolitical risks, supply-chain shifts and tariff uncertainties, currency undervaluation alone is not sufficient to spark a strong re-rating of Indian assets.

Also Read: Govt Shuts Door on FDI Limit Hike, Merger Chatter; PSU Bank Rally Now Hinges on Fundamentals

Weak Rupee Also Strengthens the Case for Global Diversification

Interestingly, the same weakness in the rupee is pushing Indian investors to explore international diversification more aggressively. A depreciating currency enhances returns from global equities when converted back into INR, offering a natural hedge against domestic volatility.

With access improving through:

• Overseas-focussed funds

• GIFT-City investment routes

• Existing global-allocation platforms

… the case for venturing abroad appears more compelling. While overall flows may remain limited due to compliance costs and regulatory hurdles, the directional trend toward global exposure is stronger than in recent years.

Policy Direction: Growth Takes Centre Stage

The equity market implications of the RBI’s stance are significant. With both fiscal and monetary authorities signalling full support for growth, domestic liquidity remains a crucial stabilising force. Retail participation through SIPs and steady inflows has already acted as a buffer during periods of FII caution.

The RBI’s posture reinforces the view that India will continue prioritizing growth support through:

• Rate cuts

• Liquidity injections

• Measures to ensure smooth credit flows

This foundation keeps the near-term outlook constructive, but also puts greater responsibility on corporate earnings to justify valuations.

Markets Now Face Two Opposing Forces

The Indian market stands at the intersection of two sharply different drivers:

1. Supportive domestic liquidity + dovish policy stance

2. Fragile global environment + currency-led uncertainty

If corporate earnings meet expectations — still the most important determinant of market direction — Indian equities should remain supported. But without a strong earnings cycle, markets may struggle to sustain momentum.

Investors should expect:

• Range-bound movement, not an explosive rally

• Domestic investors continue to anchor valuations

• Policy support acts as a cushion, but not a trigger for euphoria

Foreign investors, meanwhile, may remain cautious if the rupee continues to weaken or if trade uncertainty deepens, which could limit the market’s near-term upside.

Upcoming Budget Could Be a Key Swing Factor

Another important variable is the upcoming Union Budget, which will influence how the government balances growth-oriented spending with its commitment to fiscal consolidation. One critical unknown is whether domestic demand can offset tax revenue losses arising from the GST cut. The clarity on this front is still evolving and could significantly shape market expectations.

Additionally, markets may need to absorb a continued large equity paper supply, which has been a recent headwind for secondary-market performance.

Conclusion: Growth Floor Is Set, But a New Rally Needs Earnings

The RBI has undoubtedly provided a growth floor, but it has not ushered in a new bull phase. Currency pressures, trade uncertainties and global fragility continue to weigh on sentiment. As things stand, the next leg of the market hinges on a single factor: earnings — and whether macro anxieties fade fast enough for confidence to return.

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