Geopolitical Tensions and the Indian Rupee: Navigating Volatility in the NDF Market

The India-Pakistan military standoff in May 2025, marked by aerial strikes and retaliatory artillery exchanges, has thrust the Indian rupee (INR) into a period of heightened volatility in the non-deliverable forward (NDF) market. As geopolitical risks escalated, the rupee faced downward pressure, with the 1-month NDF rate sliding to 84.64–84.68 per U.S. dollar on May 7—its lowest level in weeks. This article explores the drivers of the currency’s decline, the role of central bank intervention, and the broader implications for investors.

The Immediate Market Reaction

The rupee’s decline followed India’s “Operation Sindoor,” a series of precision strikes targeting nine sites in Pakistan and Pakistan-administered Kashmir. While India framed the strikes as a measured response to the April 22 Pahalgam terrorist attack, Pakistan accused India of civilian casualties and vowed retaliation. In the NDF market—a key tool for hedging currency risk—the rupee opened 18 paise weaker at 84.62/$ on May 7, reflecting investor caution.

Analysts noted the RBI’s critical role in stabilizing the currency. A Mumbai-based bank trader emphasized that the central bank would intervene if markets showed “disorderly moves,” while ANZ’s Dhiraj Nim warned of “heavy-handed” RBI action to curb volatility. This expectation tempered panic, even as Pakistan claimed downed Indian jets and cross-border shelling killed civilians on both sides.

Structural and Geopolitical Drivers of Volatility

The rupee’s decline was not solely due to military tensions. Three key factors amplified the currency’s vulnerability:
1. Crude Oil Prices: Brent crude surged to $62.55/barrel, straining India’s import-dependent economy. With oil accounting for ~30% of India’s import bill, higher prices worsened the trade deficit, weakening the rupee.
2. Foreign Capital Sentiment: Foreign institutional investors (FIIs), who had pumped ₹44,500 crore into equities over 14 sessions, faced potential outflows. Analysts like Anil Kumar Bhansali of Finrex Treasury Advisors LLP cautioned that FII selling could intensify if tensions escalate, though initial reactions remained muted.
3. Geopolitical Uncertainty: The conflict’s nuclear undertones—both nations possess ~170 warheads—heightened global anxieties. UN Secretary-General António Guterres’ calls for restraint underscored the stakes, as investors braced for a prolonged standoff.

Analyst Perspectives: Containment vs. Escalation

Market participants remain divided on the conflict’s trajectory. While some see parallels to the 2019 Pulwama attack—a flashpoint that left the rupee largely unscathed—others highlight risks tied to the scale of 2025 strikes.

• Bullish on De-escalation: Darren Tay of BMP argued that Pakistan’s diplomatic isolation and India’s military restraint would limit hostilities. “A full-scale war is unlikely,” he stated, urging investors to focus on India’s long-term fundamentals, including its structural reforms and trade deals.
• Bearish on Overconfidence: Tom Miller of Gavekal Research warned that Pakistan’s pride and military posture could force a “proportionate response.” Citing the Bahawalpur mosque strike—where 26 civilians died—he noted that public outrage might pressure Islamabad to retaliate beyond India’s expectations.

Historical Context and Technical Levels

The rupee’s current decline mirrors past crises but with critical differences. In 2019, after India’s first cross-border strike since 1999, the rupee fell ~2% in NDF markets but stabilized as tensions cooled. Today, analysts like Kunal Sodhani of Shinhan Bank highlight key technical levels:
- Support at 84.25: A break below this level could signal deeper weakness.
- Resistance at 84.90–85.20: A breach here might trigger panic-driven selling.

Meanwhile, bond markets offer a counterpoint to currency concerns. The 10-year Indian government bond yield dipped to 6.339%, remaining within a 15-basis-point range—a sign that investors still trust India’s fiscal management despite geopolitical noise.

Conclusion: A Fragile Equilibrium

The Indian rupee’s decline in the NDF market underscores the precarious balance between geopolitical risks and economic fundamentals. While the RBI’s intervention readiness and India’s trade progress (e.g., U.K. FTA) provide a floor, prolonged military tensions could push the rupee toward 85/$ or beyond.

Key data points reinforce this outlook:
- Casualty Toll: 26 Pakistanis and 7 Indians killed highlight the human cost of escalation, which could deter both sides from further action.
- RBI’s Playbook: Historical interventions in 2019 and 2020 stabilized the rupee during crises, suggesting policymakers have tools to limit damage.
- Technical Levels: A close below 84.25 would confirm bearish sentiment, while staying above 84.00 might signal resilience.

Investors should remain cautious but not panic. While the rupee’s short-term path hinges on military developments, the currency’s medium-term trajectory will be shaped by RBI policy, crude prices, and India’s ability to sustain its economic growth narrative amid global headwinds. For now, the NDF market’s muted reaction—a 0.33% drop—suggests markets still bet on containment. But as Michael Kugelman of the Wilson Center warns, “Nuclear neighbors don’t play chess—they play nuclear chicken.” Stay vigilant.