Rupee Weakness Amid India-Pakistan Tensions: What Investors Should Know

MUMBAI (Dekapos) — The Indian rupee is expected to weaken further on Friday, as escalating tensions between India and Pakistan continue to unsettle financial markets.
Traders anticipate increased hedging activity and speculative moves, reflecting growing concerns over potential geopolitical fallout.

Market Opening Signals More Pressure on the Rupee

According to 1-month non-deliverable forwards (NDFs), the rupee is projected to open between 85.80 and 85.90 per U.S. dollar, compared with 85.71 in the previous session.
This signals a further slide for the currency, following one of its worst trading days in years.

On Wednesday, the rupee slumped 1.04%, marking its steepest single-day fall in more than two years.
The sharp decline came after reports that Pakistan had attempted to target Indian military installations, shaking earlier market assumptions that tensions would remain contained.

“Until yesterday afternoon, markets had largely priced in a view that there would be no meaningful worsening in India-Pakistan tensions,” said a currency trader at a Mumbai-based bank.
“That assumption is now being reassessed. Positioning in the rupee will likely need to be adjusted accordingly, which may lead to a rise in hedging and speculative activity.”

Escalating Conflict Adds to Investor Anxiety

On Thursday, both nations accused each other of launching drone attacks across the border.
Pakistan’s Defense Minister warned that further retaliation was ‘increasingly certain,’ escalating fears of prolonged hostilities.

India, for its part, claimed that Pakistani drones and missiles had struck military stations, deepening the standoff between the two nuclear-armed neighbors.
Such developments have quickly filtered through to financial markets, prompting traders and analysts to reassess risk positions.

The geopolitical uncertainty has also pushed investors to seek safe-haven assets, further strengthening the U.S. dollar while weighing on emerging-market currencies — including the rupee.

Impact on Indian Equities and Foreign Investment

Indian equity markets mirrored the nervous sentiment.
Stocks were set to open more than 1% lower on Friday as traders reacted to the rising cross-border tensions.

Despite the heightened uncertainty, data suggests that foreign investors have so far maintained a cautious optimism.
Analysts believe that global investors initially viewed the conflict as a short-term shock rather than a long-term economic threat.

Preliminary data from the National Securities Depository Limited (NSDL) showed that foreign investors were net buyers of Indian equities on Thursday — following approximately $350 million in purchases on Wednesday.

“It will be interesting to see how the numbers pan out in today’s session,” said Kunal Kurani, Assistant Vice President at Mecklai Financial.
“There’s a sense that the landscape has shifted, and traders will likely watch today’s data closely for signs of a change in foreign fund flows.”

Still, market analysts warn that prolonged geopolitical strain could reverse investor sentiment, leading to higher volatility across equities, bonds, and currencies.

Broader Market Trends and Currency Movements

Across Asia, most regional currencies weakened on Friday, tracking the rupee’s slide.
Meanwhile, the U.S. dollar index — which measures the greenback against six major currencies — rose to 100.76, reflecting growing global risk aversion.

The Brent crude oil benchmark also ticked higher by 0.1% to $62.9 per barrel, signaling cautious optimism about global demand despite geopolitical risks.
Higher oil prices typically weigh on India’s external balance, as the country remains one of the world’s largest energy importers.

Yields on the 10-year U.S. Treasury note stood at 4.37%, attracting capital flows toward U.S. assets and away from emerging markets like India.
This interest rate differential adds further downward pressure on the rupee.

Key Market Indicators

(Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala)

Geopolitical Context and Broader Implications

The India-Pakistan conflict has long been a sensitive flashpoint in South Asia, with even minor escalations capable of unsettling regional markets.
Traders often respond to such developments by increasing hedging positions or shifting funds to safer assets like the U.S. dollar, gold, or Treasury bonds.

While recent clashes have not yet affected trade or cross-border supply chains, analysts warn that sustained hostility could weigh on India’s current account, foreign investment inflows, and market confidence.
A weaker rupee, in turn, could raise import costs and fuel inflationary pressures, forcing the Reserve Bank of India (RBI) to intervene or adjust its policy stance.

“Markets are extremely sensitive to geopolitical news. Even short-lived tensions can lead to rapid capital flows and currency fluctuations,” said an economist at a Mumbai-based brokerage.
“The RBI will likely monitor the situation closely and step in if volatility spikes.”

What Investors Should Watch Next

For investors, the coming days will be critical.
Key indicators to monitor include foreign fund flows, oil price trends, and official statements from both governments.
If tensions ease, the rupee could find some stability near current levels.
However, any further escalation could trigger another round of depreciation and volatility in Indian financial markets.

Market participants are also keeping a close eye on global risk sentiment, especially as the U.S. Federal Reserve maintains a cautious approach to interest rates.
A stronger dollar and rising yields could amplify downward pressure on the rupee in the short term.

Outlook: Short-Term Weakness, Long-Term Uncertainty

While the rupee’s near-term trajectory appears tilted toward weakness, much depends on how the India-Pakistan situation evolves.
Analysts expect that the RBI may step in if the currency shows signs of disorderly movement, but broad market sentiment will remain fragile until there is more clarity on the geopolitical front.

“In times like this, even stable macro fundamentals can take a back seat to geopolitical risk,” said a senior forex strategist.
“Investors will look for reassurance — either through diplomatic progress or central bank action — before re-entering rupee positions in size.”

For now, traders are preparing for more volatility, and the rupee may continue to face headwinds as regional and global uncertainties persist.