Rupee's Sharp Recovery Against the Dollar

The rupee made a notable recovery on Friday, closing at 85.37 against the dollar after hitting an intraday low of 85.85. This rebound was largely attributed to dollar sales by public sector banks, acting on behalf of the Reserve Bank of India (RBI). The domestic currency had closed at 85.71 in the previous session.

Weekly Decline Amidst Geopolitical Tensions

Despite the late recovery, the rupee recorded its steepest weekly decline in recent weeks, shedding nearly 1%. The drop was fueled by escalating geopolitical tensions between India and Pakistan, which have rattled investor sentiment and led to outflows from sovereign bonds. The conflict has seen both nations deploying drones and artillery for three consecutive days, marking the most severe escalation in nearly three decades.

Impact on Domestic Equities and Offshore Markets

The tensions have also adversely affected domestic equities, with the Nifty 50 falling over 1% on Friday. Government bonds, after an initial dip, managed to recover later in the session. The growing nervousness was reflected in offshore markets as well, with one-month dollar-rupee non-deliverable forwards rising to a one-month high.

Operation Sindoor: A Closer Look

Amidst the tensions, India's air defence systems successfully shot down Pakistani drones in regions including Jammu & Kashmir, Punjab, and Rajasthan. The Delhi airport issued a travel advisory in light of the escalating situation, and multiple explosions were reported at several Pakistan air bases under Operation Sindoor.

Analysts suggest that while both countries have a fundamental incentive to avoid large-scale escalation in the medium term, the high level of uncertainty surrounding geopolitical developments remains a concern.