India-Pak face-off: Rupee logs worst day in over 2 yrs, erases 2025 gains

The rupee fell 1.03 per cent, bond yields rose 6 bps and equities declined as India retaliated to missile attacks by targeting Pakistani air defence systems

The rupee on Thursday erased all the gains it made in 2025 after logging its steepest single-day decline in more than two years, as investors rushed to safe-haven assets amid escalating tensions between India and Pakistan.

  According to dealers, panic dollar buying began after India confirmed it neutralised Pakistan’s attempts to target multiple military sites in its northern and western regions between Wednesday and early Thursday. 

 

The local currency depreciated to 85.79 per dollar, or 1.04 per cent, in its sharpest decline since February 2023. The 10-year government bond yield rose 6 basis points (bps) to 6.40 per cent, while the Sensex declined 412 points, or 0.51 per cent, to close at 80,335, with 23 of its constituents ending in the red. The fear gauge, India VIX, spiked 10 per cent to 21.01, the highest level since April 9. GIFT Nifty was down 304.5 per cent, or 1.26 per cent, at 11 pm.

 

  “This (rupee’s weakening) was triggered primarily by rising geopolitical tensions following India’s military action against targets in Pakistan and Pakistan-occupied Jammu & Kashmir,” said Abhishek Goenka, chief executive officer, IFA Global.

  The rupee could be under further pressure on Friday, as tensions escalated late Thursday evening. “Things look complicated in the border areas and we cannot predict what could happen on Friday,” said Anil Bhansali, head of treasury and executive director, Finrex Treasury Advisors LLP. 

 

“The government and the Reserve Bank of India (RBI) would have surely planned things and ensured that the depreciation remains orderly, as the RBI had mostly curbed its short positions between 83.75 and 84.25. The RBI is ready with all its ammunition, and so would Life Insurance Corporation,” said Bhansali of Finrex Treasury Advisors LLP.

  Goenka of IFA Global said: “Pakistan’s claim of shooting down multiple Indian drones added to the uncertainty, sparking a flight to safety and increasing demand for the US dollar. However, any signs of de-escalation between the two countries — likely due to international intervention — can normalise the markets and lead to the rupee’s strengthening again as foreign institutional investor inflows into equities remain quite robust,” he said.

 

With Thursday’s fall, the rupee erased all its gains for both the current calendar year and the financial year. As of now, it has depreciated 0.12 per cent against the US dollar this calendar year and by 0.29 per cent for the financial year. Until Wednesday, the rupee had been trading 0.92 per cent stronger against the greenback and 0.75 per cent this financial year. 

 

A rise in crude oil prices and a higher US dollar further weighed on the rupee. The dollar index was up 0.46 per cent at 100.07 on Thursday after the US Federal Reserve kept interest rates unchanged at 4.25-4.50 per cent and warned of persistent inflation and economic uncertainty. It measures the strength of the greenback against a basket of six major currencies.

 

Bond yields also inched up following India’s statement on rising tensions. “In the morning, the yields were actually down because of the open-market operation (OMO) auction, then this news came and there was selling,” said the treasury head at a private bank. “We might see some more selling on Friday because of the weekend,” he added.

 

The RBI plans to purchase ₹25,000 crore worth of government securities through an OMO auction on Friday. Bond dealers said the RBI’s continuous effort to infuse liquidity helped support market sentiment and limit losses. 

“Despite the news, we were near 6.30 per cent, but there was escalation, we can’t predict now where the yields would move from here, but overall the bond market has a positive outlook,” said the treasury head of another private bank.