Imagine you run an Indian business that imports machinery, electronics or raw materials. You have placed an order with a supplier overseas, and the payment is due next month. The amount you owe is fixed in dollars, but the amount you will pay in rupees is not.
If the rupee weakens before the payment falls due, the same shipment could cost you more than you had budgeted for. Your supplier has not changed the price. Your order has not changed. What has changed is the cost of the currency in which you must pay.
You can protect yourself against this uncertainty by agreeing on an exchange rate with a bank in advance. This is called hedging. It gives you greater certainty about your future payment, although that protection comes at a cost.
That cost has become a more immediate concern after the Reserve Bank of India introduced foreign-exchange measures on October 10 to curb speculative activity and ease pressure on the rupee.
The central bank reduced the threshold for certain rupee-linked derivative positions that could be taken without establishing an underlying exposure from $100 million to $5 million. It also restricted the rebooking of cancelled contracts and introduced a cash-reserve requirement for some hedges.
On October 12, it extended the reserve requirement to eligible rupee-linked contracts banks use to hedge their own assets and liabilities, where they buy foreign currency against rupees.
The rupee initially strengthened, settling at Rs 95.28 per dollar on October 13, after gaining 1.6% over three trading sessions. But the recovery in the spot market has coincided with disruption in the market businesses use to lock in exchange rates for future payments.
By October 15, the one-year implied cost of hedging had risen by more than 90 basis points during the week to 4.6%, its highest level since January 2022. The three-month implied cost reached 7.2%. These are market-implied costs, not charges paid uniformly by every business.
The reserve requirement helps explain why. Under the October 10 rule, banks must maintain a Foreign Exchange Risk Reserve (FERR) equal to 20% of the rupee-equivalent notional amount of eligible derivative contracts exceeding $2 million. It applies to specified customer contracts used to hedge current-account transactions when the customer buys foreign currency against rupees. Banks must deposit the reserve with the RBI and keep it there until the contract ends.
This is not a 20% fee charged directly to the importer. It is cash the bank must set aside against an eligible contract, leaving that money unavailable for other uses.
The October 12 extension covers eligible rupee-linked contracts banks enter into to hedge their own assets and liabilities, where they buy foreign currency against rupees. The directions specify no minimum transaction threshold for these bank contracts.
Banks have sought clarity on how the reserve should be calculated, including whether linked customer and interbank transactions could lead to the requirement effectively being applied twice.
Some lenders have become cautious about quoting certain contracts while they work through the rules. Bankers have also said the added cost is being reflected in customer pricing, although the extent of the eventual pass-through remains uncertain.
The RBI is also trying to reduce the demand for dollars in the spot market. A special window allows Indian Oil, Bharat Petroleum and Hindustan Petroleum to buy dollars through designated banks rather than competing for them in that market.
Industry estimates suggest the arrangement could redirect $11-12 billion in monthly demand. The companies still need those dollars to pay for imported crude. The change is in how they obtain them.
The two interventions address different parts of the currency market. One changes the cost and conditions of certain derivative transactions; the other redirects a major source of dollar demand.
Whether they can ease pressure on the rupee without making legitimate currency hedging more difficult or expensive remains unclear.
Big Bang Sale
The government this week finally announced the divestment of IDBI Bank, a deal that had been in the making for over four years and marks the turnaround of a lender which was on the brink of a collapse less than a decade ago.
The Union Cabinet approved the sale of a 60.72% stake in IDBI Bank to Canada’s Fairfax Financial for Rs 52,878 crore. The government is selling 30.48% of the bank and Life Insurance Corporation of India (LIC) another 30.24%. Once the deal is completed, the government and the LIC will hold 34% of IDBI Bank though they can sell this later on the open market.
The government will get about Rs 26,400 crore by selling its stake. This will balloon its divestment receipts for 2026-27 to Rs 82,200 crore, from Rs 55,757 crore as of October 15 and exceeding the target of Rs 80,000 crore.
For the government, crossing the disinvestment target would be a fiscal milestone. But the deal has broader significance.
For one, this is the largest foreign direct investment in India’s banking sector and highlights the growing overseas investments in the financial services sector over the last couple of years.
In other significant deals, the UAE’s Emirates NBD has bought a majority stake in private-sector lender RBL Bank for Rs 26,000 crore. Japan’s Sumitomo Mitsui Banking Corporation bought a 20% stake in Yes Bank for Rs 13,480 crore and then bought another 4.9%. Japan’s MUFG acquired a 20% holding in non-bank lender Shriram Finance for $4.4 billion while American buyout firm Blackstone bought a 9.9% stake in Federal Bank for over $700 million.
Another reason for the latest deal’s significance is Fairfax itself. The company, led by Indian-born Canadian billionaire Prem Watsa, has been investing in India for more than two decades. Its portfolio includes a majority stake in companies such as Thomas Cook India and minority investments in several others.
Fairfax has been an active investor in the financial services sector, having previously invested in several IIFL Group companies as well as in insurance firm Digit and CSB Bank.
The Canadian firm said it plans to transform IDBI Bank into a diversified financial services group by transferring its stake in IIFL Capital Services and its 49% stake in insurance company Digit. Fairfax owns a 30.2% stake in IIFL Capital, which runs investment banking and wealth management businesses, and is raising it to 51%. As for CSB Bank, in which it holds 40%, the RBI has given the company two years to decide whether to merge it with IDBI or sell this stake.
The IDBI deal is Fairfax’s most ambitious transaction in India. It gives the company control of an established—and now profitable—bank with a strong brand recall. For IDBI Bank, which was struggling until 2019 with nearly a third of its loan book turning bad when LIC took over and the government began to inject fresh capital, this comes as a new beginning.
Tax Tweaks in the Offing?
Let’s now move on from banking to markets and policymaking. Foreign investors have pulled nearly $32.8 billion out of Indian equities so far this year, adding to the $18.9 billion outflow last year. In such a scenario, tax relief has re-emerged as one possible way to improve the market’s appeal.
But the debate is not simply about lowering taxes. It is also about what the government wants to encourage: longer-term investment or less speculative trading.
Finance Minister Nirmala Sitharaman said this week that the government was open to hearing views on long-term capital gains (LTCG) tax and securities transaction tax (STT) ahead of the next Union Budget. She made no commitment to changing either. The remarks followed a proposal by SBI Research to abolish LTCG tax on equities while extending the qualifying holding period to two or three years from one year currently.
The proposal has two parts, and they would affect investors differently. Under current rules, eligible listed shares and equity-oriented mutual fund units held for more than 12 months qualify for long-term treatment. Gains above Rs 1.25 lakh a year are taxed at 12.5%.
Under the SBI Research proposal, qualifying long-term gains would become tax-free, but investors would have to hold their investments for longer. Someone selling after 18 months, for instance, could see gains taxed at the short-term rate of 20%, rather than the current long-term rate. The proposal could reward patience while raising the tax burden for some investors who sell earlier.
STT addresses a different activity. It is charged on specified market transactions, whether or not they produce a profit. From April 1, 2026, the government raised STT on futures from 0.02% to 0.05% of traded value, and on the sale of options from 0.10% to 0.15%. The rate on exercised options also increased. The changes targeted derivatives trading; the 0.1% STT on delivery-based equity purchases and sales remained unchanged.
The revenue at stake is significant. STT collections reached Rs 46,840 crore by October 14, up 51.6% from a year earlier. Higher derivatives tax rates contributed to the increase, alongside market activity.
Separately, reported collections from LTCG tax on equity transactions reached Rs 1.29 lakh crore in assessment year 2025-26, against Rs 72,249 crore in the previous year. These figures relate to different revenue measures and periods, and they indicate the scale of the tax base rather than the amount the government would lose under a proposed change.
A lower LTCG tax could improve investors’ post-tax returns, but it would not guarantee fresh foreign inflows. Those also depend on valuations, earnings, currency movements and global conditions. Meanwhile, raising derivatives taxes and reconsidering long-term capital gains taxation need not be contradictory: the measures address different types of market activity.
The government has opened a debate, not announced a change. The question is whether a different tax structure can reward longer holding periods without an unacceptable fiscal cost, and how much that incentive can influence investor behaviour.
The Heavy Local Bid
While the debate on how to bring back foreign investors continues, local mutual fund investors continue to invest heavily.
Net inflows into equity mutual funds rose 31% from August to Rs 38,307 crore in September, according to data from the Association of Mutual Funds in India (AMFI). It was the 67th consecutive month of net inflows, extending the longest such streak on record.
Monthly contributions through systematic investment plans (SIPs) also reached a record Rs 32,490 crore, up marginally from August. These regular contributions have become a consistent feature of the market, even when stock prices are under pressure.
The interest extended beyond large companies. Small-cap funds attracted a record Rs 9,039 crore in September, while mid-cap funds drew Rs 7,835 crore, also a record. Inflows into the two categories rose 13% and 12%, respectively, from the previous month.
The contrast with market performance was striking. The Nifty 50 fell 6.1% in September and is down over 12% year to date in 2026. The small-cap index, however, is up around 9% for the year.
AMFI chief executive Venkat Chalasani said steady domestic flows, particularly through SIPs, reflected support from local institutions and retail investors despite higher inflationary pressures, crude prices and US bond yields.
Investors also continued to put money into precious metals. Gold ETFs attracted Rs 4,451 crore in September, up 71% from August, while silver ETFs drew Rs 1,974 crore.
Domestic flows cannot guarantee that markets will hold up when foreign investors sell. But September offered a clear sign of continuity: investors kept contributing to equity funds through a weak month for stocks. That steady participation is an important part of how India’s market is changing, even as its limits remain to be tested.
Market wrap
India’s stock market benchmarks jumped this week thanks to a rally in IT companies that reported strong earnings and because of a selloff in global AI stocks.
The Nifty 50 rose 2.8% and the BSE Sensex jumped 3.1%. This is their best weekly performance in six months.
In the broader market, small-caps fell 0.1% and the mid-caps rose 0.6%. As many as 12 of the 16 major sectors logged weekly gains, with the IT index soaring 11.7% in what Reuters said was its steepest climb since 2008.
IT companies were the Nifty’s top gainers, led by Tech Mahindra’s almost 18% surge. TCS, Infosys and HCLTech climbed around 13-14% each.
Auto stocks rallied, too, with Bajaj Auto revving up 7% and Mahindra & Mahindra jumping 4.4%. Telecom operator Bharti Airtel gained 5.5% as investors awaited its rival Jio Platforms’ IPO next week.
Among heavyweights, Jio parent Reliance Industries rose 3.3% while ICICI Bank and HDFC Bank climbed 3% and 2.8%, respectively. Other gainers included JSW Steel, Eicher, Dr Reddy’s Labs, UltraTech and Tata Consumer.
Only about a dozen Nifty stocks ended in the red. Nestle India was the biggest loser, falling over 5%. ITC, hospital chains Max Healthcare and Apollo, IndiGo parent InterGlobe, and Larsen & Toubro were among the other laggards.
Earnings snapshot
- HCLTech beats estimates as profit jumps 21.2% to Rs 5,132 crore; revenue up 11.5% at Rs 35,620 crore
- Wipro Q2 profit falls 1.5% to Rs 3,201 crore, missing forecasts; revenue up 9.1% at Rs 24,753 crore
- Tech Mahindra profit jumps 32.7% to Rs 1,586 crore, lags estimates; revenue up 15.6% at Rs 16,180 crore
- Tata Technologies profit up 3.6% at Rs 171 crore, revenue soars 28.4% to Rs 1,699 crore
- HDFC Life Insurance profit rises 13.6% to Rs 508 crore, net premium income up 16%
- ICICI Life Insurance profit jumps 25% to Rs 374 crore
- ICICI Lombard General Insurance profit rises 15.5% to Rs 946 crore, net premiums jump 17.7%
- Nestle India net profit jumps 36% to Rs 1,027 crore, revenue climbs 20% to Rs 6,788 crore
- Tyre maker CEAT’s Q2 consolidated net profit slumps 40% to Rs 112 crore
Other Headlines
- SEBI partly reverses derivative settlement rules after pushback
- Govt postpones UPI payment fee rollout until after Diwali
- Jio Platforms sets price band of Rs 1,065-1,119 for Rs 30,000-crore IPO; issue opens Oct 21
- Kotak Mahindra Mutual Fund, UTI MF, HDFC MF stop bulk subscriptions to gold ETFs
- Supreme Court scraps Yes Bank’s Rs 8,400-crore AT-1 bond write-off in 2020
- India’s retail inflation accelerates to 5.54%, wholesale inflation at 11.4% in September
- India’s goods trade deficit widens to $30.21 billion in September from $26.86 billion in August
- First phase of India-US trade deal nearly done, says commerce minister Piyush Goyal
- SEBI proposes tightening profitability requirements for smaller companies seeking to float IPOs
- Netflix laying off 6% of global workforce, or about 1,000 employees, in biggest cuts since 2022
- NMC Health founder BR Shetty files $15-billion lawsuit against Bank of Baroda, others
- Adani Enterprises to form AI data centre equipment JV with Apple supplier Jabil
- Hyundai, Kia to invest $15.5 billion in India through 2032
- Stellantis, Tata Motors Passenger Vehicles to develop vehicles in India
That’s all for this week. Until next week, happy investing!
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