The world after the US midterm elections seems like a different place, with markets providing their verdict on the blue wave. The election outcome captured the fury among US voters over the elevated cost of living and the US-Iran conflict. The market price action is clear, with the weak mandate for President Trump translating into lower geopolitical risks and crude oil prices. The fixed income market is also pricing in a more benign inflation outlook, with moderation in US Treasury yields. Market pricing for the US Federal Reserve policy action has reduced to less than a 50-bps hike over the next one year, down from 75-bps previously.

India, which has faced multiple shocks this year, might get some breathing space. FPI inflows turned positive in November 2026, with the AI-led capex super cycle in the US facing valuation challenges and potential regulatory hurdles.

This raises hope that the challenges faced by the Indian rupee over the last few years may be reducing going forward. That said, the appreciation in the rupee is likely to remain capped as the fundamentals have not changed. India’s April-September BoP surplus is tracking at $65 billion with the help of FCNR(B) inflows. To date, India has got $150 billion under the three swap windows: FCNR(B), ECB and OFCB. If we exclude the swap windows, the BoP in April-September would have been a deficit of $85 billion.

This underscores the pressure on the external account due to the challenging global environment. In April-September, even after incorporating some moderation in crude oil prices and improvement in investment inflows, FPI as well as FDI, the overall BoP is tracking mildly negative. For 2026-27 as a whole, BoP surplus is estimated at $50 billion, indicating some outflows in October-March.

Historically, BoP surplus and dollar/rupee outcomes don’t have a strong linkage, as a lot depends on RBI policy action. To illustrate this, in 2023-24 when the BoP surplus was exceptionally strong at $64 billion, the Indian rupee depreciated by 1.5%. This was the year when India got $44 billion in net FPI inflows, but stable FDI inflows had slowed to $10 billion. The Indian crude basket had also declined to $83/bbl in 2023-24 from $93.5/bbl in 2022-23. In the second half of FY27, crude oil prices remain elevated and the improvement in FPI inflows is expected to be moderate.

Crude oil prices could correct sharply if a peace agreement is reached between the US and Iran. The improvement in oil supply will also coincide with a rise in demand as countries focus on restocking their strategic reserves, which are currently near multi-year lows. One factor which has kept crude oil prices somewhat contained has been the sharp reduction in oil imports by China. This source of demand would also return on a peace agreement. Hence, while there could be a significant reduction in crude oil prices, the downward movement will be capped by pent-up demand.

The improvement in capital inflows is expected to remain moderate as the competition and cost of global capital remain elevated. There has been some reduction in US Treasury yields, with markets pricing in a stalled Trump presidency and the possibility of moderation in geopolitical risks. However, the fundamental factor behind high US Treasury yields are years of expansionary US fiscal policy. This factor will only change if there is a concerted move in the US to cut its fiscal deficit. Another factor is developed market (DM) central banks, which continue to hike policy rates in response to elevated inflation. A key differentiating factor of the current crisis period is that global policy space, fiscal and monetary, to support growth is very limited.

The years of expansionary fiscal policy in the US have resulted in its growing reliance on global capital. To put this in perspective, the net international liabilities of the US, which represent foreign borrowing by the US, have risen from $11.7 trillion in 2019 to $22.4 trillion as of June 2026. Over the same period, the major suppliers of global capital have seen a much more muted increase in net international assets. The major suppliers of capital are China, Japan, the Euro Area and Hong Kong, whose net international assets rose from $6.1 trillion in 2019 to $12 trillion as of June 2026. Hence, competition to attract global capital will persist, with US Treasury yields remaining elevated.

The most important factor remains the RBI’s policy action in determining the trajectory of the Indian rupee going forward. The central bank has taken significant macroprudential measures to stabilise the rupee and these have clearly been effective. The oil window for three oil marketing companies has significantly reduced pressure on the spot market. The three OMCs account for $12 billion of oil imports per month, with this demand being met by RBI via designated banks. The measure doesn’t reduce depletion of FX reserves but reduces volatility in the spot market.

The next set of measures restricted hedging by importers. RBI introduced the Foreign Exchange Risk Reserve (FERR), which is like an FX CRR, with 20% applied to the notional amount of foreign exchange derivative contracts involving the rupee for importers hedging current account exposures. This effectively increases hedging costs for importers by 1.5%. The gap between client forward dollar purchases and sales provides an estimate of dollar demand generated by hedging behaviour. This gap rose from $97 billion in 2022-23 to $233 billion in 2025-26 and is tracking at $197 billion in the first seven months of FY27. This reflects expectations of continued rupee depreciation, resulting in higher hedging by importers and significantly lower hedging by exporters. Post-RBI measures, there has been a visible drop in importer hedging, with the gap reducing to $17 billion in October 2026, a 12-month low.

The effectiveness of RBI measures will be reflected in the change in hedging demand and the quantum of dollar selling by RBI in the remainder of FY27. FERR has reduced importer hedging, but if the belief that INR will continue to depreciate persists, hedging volumes could pick up again. To change this belief, two factors will be needed: first, a significant fall in crude oil prices, and second, a sustained pick-up in investment inflows. Given the intense competition from the US for global capital, the rate of return on investments will need to be competitive.