Bulls Failed to Take Off, Market Awaits RBI’s Policy Decision

As of this writing, India’s largest airline faces significant hurdles as it struggles to take off, mirroring the challenges the Indian stock market faces despite robust economic growth. Over the weekend, India’s GDP growth numbers for Q2FY26, a surprising 8.2 per cent. This growth, driven by investments, a strong services sector, and consistent private consumption, initially sparked positive sentiment, aiding the Nifty 50 to a fresh all-time high on Monday. However, despite the favorable print, the momentum faltered, and the bulls struggled to maintain their flight.[EasyDNNnews:PaidContentStart]

While GDP growth presents an optimistic picture, the International Monetary Fund (IMF), in its annual staff report for 2025, presented a more cautious tone. The IMF retained a ‘C’ grade for India’s GDP data methodology, citing weak transparency, inconsistent revisions, and a Reliance on indirect indicators rather than direct measurements. This created a cloud over the sustainability of the positive growth outlook. Additionally, the Indian Rupee has fallen to a concerning level of 90 against the US Dollar, exacerbated by ongoing equity outflows and the unresolved India-US trade deal. The depreciation of the rupee is a significant concern for market participants, adding a layer of uncertainty to the economic narrative.

However, not all is gloomy. Despite these challenges, the recent market correction appears to be a healthy one. The Nifty 50 has held on to its critical short-term support at the 20-DMA. Additionally, while the rupee's depreciation has dominated headlines, it is important to understand that this is not necessarily a crisis but rather an adjustment required for the economy.

A deeper dive into currency movements provides perspective. Over the past year, the US Dollar Index has declined by 6 per cent, which, in theory, should have led to an appreciation of other currencies. Yet, the rupee has depreciated by roughly the same percentage. To understand the real impact, we need to consider the Real Effective Exchange Rate (REER), which adjusts for inflation and trade, offering a clearer picture of a currency’s true value relative to economic fundamentals. A REER value above 100 indicates an overvalued currency, making exports expensive and imports cheaper. In contrast, a value below 100 signals an undervalued currency, making exports cheaper and imports costlier.

As of October 2025, India’s REER stands at 95, marking an 8 per cent real depreciation from 103 a year ago—the largest correction among major Asian currencies this year. While this makes Indian goods more competitively priced in the global market, the full benefits of this depreciation won’t materialise immediately, particularly with the lingering impact of the US tariffs on Indian exports.

Inflation also plays a crucial role in currency movements. India’s inflation rate typically outpaces that of advanced economies by 3-4 per cent. In such periods, a gradual depreciation of the rupee is necessary to maintain equilibrium. The RBI, under former Governor Shaktikanta Das, intervened heavily to stabilise the rupee, but this created an artificially strong currency. The new RBI Governor, Sanjay Malhotra, has adopted a more flexible approach, intervening only when needed to reduce volatility. This has allowed the rupee to adjust naturally in line with India’s relatively low inflation levels compared to some advanced economies, further pushing it into undervalued territory, which should, in turn, boost India’s export competitiveness.

However, the shadow of US tariffs still looms large, complicating matters for Indian exporters. A trade deal with the US would alleviate some of these pressures, but with no agreement in sight, the rupee’s volatility could persist. Despite the IMF’s concerns over India’s GDP data, the strong growth in Q2FY26 remains intact, and any revisions to the GDP base year and methodology could potentially address these concerns.

Looking ahead, all eyes will be on the RBI’s next policy decision, which could dictate the near-term trajectory of the markets. The 20-DMA will remain a crucial support level, and it will be interesting to see if the bulls can once again take off from this point. For now, the market appears to be in a wait and watch mode.

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