Markets to monitor RBI’s expected record surplus transfer FY26, may also see volatility ahead of monthly expiry

Markets may witness some volatility ahead of the monthly expiry this week, although gradual upside could emerge if crude oil prices soften, the rupee continues stabilising towards the 95–96/USD range, and constructive progress in the ongoing US-Iran negotiations sustains. However, mixed signals from the talks, elevated Brent crude prices and volatile Foreign Institutional Investor flows are likely to keep investor sentiment cautious.

Markets will also monitor the Reserve Bank of India’s expected record surplus transfer of Rs 2.9–3.2 lakh crore to the government for FY26, supported largely by gains from profitable US dollar sales during its intervention to stabilise the rupee. While the payout could provide additional fiscal space and support government spending without sharply increasing borrowing; however, elevated crude oil prices, rupee weakness and geopolitical risks may continue to pressure India’s fiscal position despite the windfall.

This week, key triggers include the Quad Foreign Ministers’ Meeting in New Delhi, which could support defence and semiconductor deal flow, alongside the FOMC Minutes, US GDP and PCE inflation data, which will shape rate cut expectations, emerging market flows and the rupee trajectory. India’s April trade deficit data will also be tracked closely amid elevated crude oil prices.

An Iran ceasefire or Hormuz resolution remains the single binary that would simultaneously re-rate crude, the rupee, and equity multiples; until that materialises, consolidation with a mild positive bias remains the base case. Last week, Nifty 50 ending marginally higher at +0.3% week-on-week, while broader markets remained mixed, with the Midcap 100 outperforming +1.4% and the Smallcap 100 declining 0.4%. The Nifty IT index surged over 4.3% this week, driven by a depreciating Rupee reaching record lows and positive spillover from Wall Street's technology.

The week's defining macro development was Brent crude's sharp intraweek swing — from $107 to $102 across two sessions before partially recovering to approximately $104.52 on May 22 — as growing optimism around US-Iran talks gaining ground briefly pulled prices lower. A sustained move below $100 would meaningfully ease the pressure on the rupee, inflation expectations, and equity valuations simultaneously — making the Iran negotiation track the single most consequential variable for Indian markets in the weeks ahead.

The rupee bore the sharpest impact of the week's macro crosscurrents. The currency breached a fresh all-time low of 96.89 on May 20, driven by elevated crude import costs and sustained Foreign Institutional Investor outflows, before RBI intervened via offshore dollar sales on May 21, bouncing the rupee to ~95.8. To address the banking system liquidity drained by heavy spot intervention, the Reserve Bank subsequently announced a $5 billion USD/INR buy-sell swap auction for May 26 at a three-year tenor — a structural liquidity management measure rather than a one-off defence.

India's 10-year government securities yield held at approximately 7.1% against the US 10-year at approximately 4.6%, a spread of around 250 basis points that is near historic lows — driven by rising US yields rather than weakening Indian bonds. Spread compression at this level, combined with rupee depreciation, directly reduces the rupee-adjusted return on Indian fixed income for foreign investors, which goes a meaningful way in explaining the persistence of Foreign Institutional Investor outflows despite reasonable domestic fundamentals.

On the domestic demand side, India's peak power demand touched 265.44 GW on May 20 and crossed 270.82 GW on May 21 — the fourth consecutive all-time high and above the Power Ministry's projected seasonal ceiling of 270 GW — as a severe heatwave swept large parts of the country. For investors, it reinforces the near-term earnings visibility for power utilities, transmission and distribution players, and consumer durables names exposed to cooling products. The energy and capital goods complex more broadly remains well-supported by a combination of domestic policy tailwinds, strong order book visibility, and an acute seasonal demand catalyst that is playing out in real time.

(The writer is Head of Research, Wealth Management, MOFSL)