NEW DELHI — From exporters grappling with punitive U.S. tariffs to bank treasuries feeling the pressure of rising bond yields, India’s financial markets are calling for a decisive response from the Reserve Bank of India (RBI). The central bank, which is typically expected to intervene when market equilibrium is threatened, has so far refrained from taking tangible action, sparking a debate among economists and market participants.
The latest economic shock comes from U.S. President Donald Trump’s 50% tariff on Indian exports, a measure that India’s Chief Economic Adviser, V. Anantha Nageswaran, warned could cut the country’s GDP by 0.5% to 0.6% this year. The government has attempted to mitigate the damage by cutting consumption taxes, a move that sacrifices ₹480 billion ($5.4 billion) in revenue and has raised concerns about the strain on public finances amid slowing tax collections.
The lack of central bank intervention is a notable shift from earlier this year when the RBI aggressively purchased bonds to support credit growth. “It’s hard to know whether the authorities should come in to stabilize the market or not, as the threshold for pain is different under each Governor,” said Nathan Sribalasundaram, a rates strategist at Nomura Holdings Inc. “This Governor has taken a more relaxed approach, especially with regard to FX.” A spokesperson for the Reserve Bank of India did not respond to a request for comment.
Bond Market and Rupee Under Strain
The bond market has been particularly volatile, with benchmark yields surging to a five-month high of 6.66% in late August. This spike was driven by waning demand from insurers and pension funds, prompting banks to urge the RBI to reduce the supply of long-dated bonds.
Meanwhile, attention is also fixed on the Indian rupee, which has been Asia’s worst-performing currency this year, falling about 3% against the U.S. dollar. For some, a weaker rupee is not a problem but a solution. Gaura Sen Gupta, chief economist at IDFC First Bank Ltd., believes that allowing the currency to depreciate is “the only tool in the near term to deal with high bilateral tariffs,” a strategy that China has successfully employed in the past. Exporters have also pleaded with the RBI to allow them to convert their U.S. proceeds at more favorable exchange rates.
The Case Against Intervention
Not everyone agrees that the RBI should step in. Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA, cautioned that any “overt support to the bond market risks being interpreted as a policy misstep,” especially with the likelihood of price pressures re-emerging. This concern aligns with comments from Finance Minister Nirmala Sitharaman, who recently stated that high bond yields are “not affordable” in a low-interest-rate environment.
According to analysts at Nomura Holdings, the RBI has several options at its disposal, including intervening via secondary-market purchases of bonds or rejecting bids at its weekly bond auctions, but it has yet to utilize them.
The current situation presents a difficult balancing act for the RBI: intervene to alleviate market pain and risk fueling inflation, or remain on the sidelines and allow market forces, and their negative consequences, to play out.
India’s Central Bank Faces Growing Pressure To Intervene Amid Trade Tariffs And Bond Market Volatility
