India's equity market has recently fallen to seventh place globally by market capitalization, overtaken by South Korea and Taiwan, whose semiconductor-heavy markets have surged due to the AI boom [1]. Societe Generale analysts Santosh Ejantkar and Tanmay Purohit report that this underperformance is reflected in significant foreign portfolio investor (FPI) outflows totaling about $56.9 billion since October 2024, which have contributed to depreciation in the Indian rupee (INR) [1].
The Reserve Bank of India (RBI) is under pressure to stabilize the currency, with some market participants expecting a 25 basis point rate hike to 5.50%. However, most economists anticipate no change, though Societe Generale forecasts a 25bp hike [1]. If rates are held steady, the RBI may consider additional measures such as foreign exchange restrictions or liquidity tools to prevent the INR from slipping towards 97 against the USD again [1].
Meanwhile, the 10-year Indian government bond (IGB) yield has stabilized above 7.0%, but the corporate bond market is showing signs of weakness. The benchmark AAA yield is above 8%, and corporate bond issuance has slowed sharply to INR1.07 trillion ($11.2 billion) in April-May, marking the lowest for the first two-month period of any financial year since 2022 [1].
CONCLUSION
India's equity market is facing significant pressure from foreign outflows and currency depreciation, prompting speculation about potential RBI intervention. The weakening corporate bond market and elevated yields further underscore the challenges ahead for Indian financial markets.