The Indian Rupee is under pressure as the USD/INR approaches the 92.00 mark. Investors eagerly await the FY2026/27 Budget announcement for guidance on fiscal management amid rising capital outflows. Analysts expect the government to aim for a debt-to-GDP ratio of about 54-55% for FY2026/27. India has two major events coming up: the Budget announcement and the RBI’s monetary policy decision. Market participants are looking for the Indian government to show a clear commitment to fiscal discipline, especially as state governments need to borrow more to support cash transfer programs.

Fiscal Responsibility and Market Expectations

Markets believe India might set a debt-to-GDP target of 54-55% for FY2026/27, down from the current 56%. This change reflects a push for fiscal responsibility. The Indian Rupee is facing pressure as USD/INR tests the 92.00 level. The upcoming Union Budget for FY2026/27 and the Reserve Bank of India’s decision on monetary policy are significant concerns. These events are creating uncertainty, which is reflected in the derivative markets. Recent capital outflows are adding to this pressure, with foreign portfolio investors withdrawing over $2.5 billion from Indian stocks in January 2026 alone. This is a sharp decline from the positive inflows seen in late 2025, showing how sensitive foreign investors are to the upcoming fiscal announcements. We will closely monitor the budget for a clear commitment to fiscal consolidation. Markets expect the government to target a debt-to-GDP ratio of 54-55% for the next fiscal year. This focus is important because the pace of debt reduction has slowed compared to the swift improvements immediately following the pandemic. Given the high uncertainty, we should prepare for increased short-term volatility. Looking at the budget presentation in February 2025, implied volatility on one-month USD/INR options rose by over 150 basis points in the week prior. Traders might consider strategies like long straddles or strangles to benefit from significant price movements, regardless of the budget outcome.

Impact of State Borrowing on Fiscal Policy

The central government’s fiscal strategy is complicated by rising borrowing from state governments. In 2025, several states took on more debt to fund various cash transfer programs. This trend makes the national fiscal situation more complex and could hinder the central government’s consolidation efforts. The RBI’s monetary policy decision will likely be influenced by the budget’s fiscal approach. A fiscally responsible budget could give the central bank more flexibility on interest rates later in the year. On the other hand, any fiscal shortfalls might force the RBI to maintain a tighter policy stance to support the rupee. Create your live VT Markets account and start trading now.

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