CareEdge Markets Roundup: West Asia Conflict, Oil Prices and Global Inflation Shape Market Outlook
Elevated crude prices, tighter Indian liquidity, rupee pressures and foreign investor outflows influence the economic outlook in October 2026
CareEdge’s latest Markets Roundup: Macro Trends and Market Outlook highlights the impact of escalating geopolitical tensions, rising commodity prices, changing interest-rate expectations and domestic monetary tightening on global and Indian financial markets. The report examines developments in energy, food and industrial metals, government borrowing, banking liquidity, currency markets and equity performance.
West Asia Conflict Keeps Oil Prices Elevated
The intensifying conflict in West Asia has kept crude oil prices high amid attacks on energy infrastructure and shipping routes. Yemen’s Houthi rebels have increased attacks on Saudi oil facilities and airports, including Riyadh’s main airport. A missile strike on Saudi Aramco’s Dhahran complex reportedly caused a fire, following earlier attacks on the Jazan refinery in July and the East-West pipeline in September.
Iran has also targeted tankers in and near the Strait of Hormuz, although the US says more vessels are transiting under its protection.
Brent crude remained above USD 100 per barrel over the preceding two weeks, trading between USD 100 and USD 108 per barrel. Spot Brent reached approximately USD 135 per barrel in early October, indicating tight physical supply. OPEC+ kept its November output targets unchanged, while Gulf producers continued to pump below their quotas.
A Russia-Ukraine “energy ceasefire” announced by US President Donald Trump, although unconfirmed by either side, recently eased market concerns to some extent.
Three Factors Influencing the Oil Market
1. Wider spreads between spot prices and futures
India’s crude basket and spot Brent prices averaged approximately USD 123 and USD 126 per barrel, respectively, during October to date. Both were significantly above the Brent front-month futures price, reported in the source as averaging USD 103 per barrel. The divergence reflects limited physical crude availability, while geopolitical risks and higher shipping and insurance costs are adding to delivered oil prices.
2. Rising refining margins
Fuel prices have risen faster than crude prices, pushing refining margins to elevated levels. The US diesel crack spread has reached around USD 70 per barrel, compared with USD 20–25 per barrel under normal conditions. Attacks on Russian and Gulf refineries have reduced capacity, while low fuel inventories have supported diesel and jet fuel prices.
3. Potential seasonal demand increases
Oil demand typically rises during winter, particularly in Europe and North America, where heating requirements increase. Countries may also need to replenish inventories depleted during the conflict, while China has resumed buying more crude oil. OPEC has lowered its 2026 demand forecast for the sixth consecutive time but raised its 2027 forecast, partly reflecting expectations of restocking.
These factors could add further upward pressure to energy prices in the coming months.
Food and Industrial Metal Prices Add to Inflation Risks
Global food prices have increased amid higher prices for sugar, edible oils and foodgrains. El Niño-related below-normal rainfall in Southeast Asia has affected edible oil production, particularly palm oil. Disruptions in the Black Sea region linked to the Russia-Ukraine conflict have also contributed to higher prices for edible oils and cereals.
Disruptions along key maritime routes and adverse weather conditions have pushed up cereal prices, particularly rice. Higher fertiliser costs have added to agricultural production expenses, while lower sugarcane production in Thailand and concerns about crop prospects in India amid below-normal rainfall have supported global sugar prices.
The diversion of foodgrains towards biofuel production amid elevated energy prices is adding to these pressures.
Industrial metal prices have also remained elevated, although movements vary by commodity. Copper reached a record high amid concerns over falling inventories and supply disruptions, supported by demand from electrification, renewable energy and data centres. Aluminium prices eased from their May highs following some de-escalation in West Asia but remained above year-earlier levels.
Higher food and industrial commodity prices could feed into consumer inflation across global economies.
Global Bond Yields and Interest-Rate Expectations
Global government bond markets have faced pressure from fiscal sustainability concerns and persistent inflation, keeping long-term yields and term premia elevated. Yields have eased over the past couple of weeks following a sharp sell-off in longer-dated government bonds, although they remain high by historical standards.
At current levels, government bonds have become more attractive to investors seeking safer assets. This shift has supported bond prices and contributed to the recent moderation in yields, while concerns remain that higher borrowing costs could constrain economic growth and increase financing pressures for debt-intensive sectors, including AI infrastructure.
Inflation remains above central bank targets across most major economies, reinforcing expectations of further monetary tightening.
Markets expect the US Federal Reserve to keep rates unchanged at its October meeting before potentially resuming increases. The Overnight Index Swap (OIS) curve indicates expectations of two additional 25-basis-point rate hikes in December 2026 and March 2027. Euro short-term rate (ESTR) forwards similarly imply two 25-basis-point increases by the European Central Bank over the same period.
RBI Tightens Liquidity as Indian Yields Rise
The Reserve Bank of India (RBI) has stepped up liquidity absorption measures following strong foreign currency non-resident (FCNR) inflows.
On 13 October 2026, the RBI conducted an open market operation (OMO) sale of government securities worth Rs 250 billion. This followed OMO sales in September, through which the central bank absorbed Rs 1 trillion in three tranches.
The report describes the RBI’s policy stance as shifting towards “calibrated tightening”, alongside a 25-basis-point rate hike. Future liquidity management is expected to rely on active OMO sales, while additional liquidity absorption could come from higher festive-season currency demand, the maturity of the RBI’s short dollar forward positions and increased cash reserve requirements linked to deposit growth.
Banking system liquidity moderated to 0.9% of net demand and time liabilities (NDTL) as of 15 October 2026, approaching the average of 0.8% recorded between May 2025 and May 2026 before the FCNR-related inflows.
The RBI also raised the minimum daily cash reserve ratio (CRR) maintenance requirement from 90% to 99% of the prescribed requirement, effective from the reporting fortnight beginning 16 October 2026. The tighter requirement limits banks’ ability to deploy a larger share of their funds in short-term markets.
These measures have pushed up the weighted average call money rate and yields across maturities. CareEdge expects the ongoing rate-hiking cycle to remain relatively shallow, with a further cumulative increase of 50 basis points over the next few policy meetings.
Government Borrowing and IDBI Bank Disinvestment
The Centre borrowed Rs 8.1 trillion during the first half of FY27, equivalent to 99.2% of the planned amount and 2.9% higher than a year earlier.
The government’s borrowing calendar for the second half of FY27 provides for gross borrowings of Rs 7.9 trillion, including Rs 4.8 trillion in the third quarter and Rs 3.1 trillion in the fourth quarter.
State development loan (SDL) issuances increased 6.7% year-on-year to Rs 5 trillion in H1 FY27, representing 87% of the planned amount. States are expected to borrow a further Rs 3.6 trillion in Q3 FY27.
The Cabinet has approved the sale of a combined 60.72% stake in IDBI Bank to Fairfax Financial Holdings for Rs 529 billion. Of this amount, approximately Rs 265 billion is expected to accrue to the Centre from its 30.48% stake, with LIC holding the remaining stake.
CareEdge expects miscellaneous capital receipts, including disinvestment and asset monetisation proceeds, to approach Rs 1 trillion in FY27, compared with the budgeted target of Rs 800 billion. The additional receipts could provide fiscal headroom to absorb expenditure pressures, particularly from higher subsidies and fuel excise duty cuts amid elevated global oil prices.
Deposit Growth Accelerates, but Credit Expansion Remains Strong
Bank deposit growth accelerated to 17.8% year-on-year in September, its highest level since December 2011. Credit growth remained robust at 19.4%.
Strong FCNR inflows have eased bank funding pressures, bringing the incremental credit-deposit ratio down to 87% at the end of September from 114% at the end of May.
Sectoral credit growth remained broad-based in August:
- Agriculture: 17% year-on-year
- Industry: 18%
- Services: 24%
- Personal loans: 17%
The figures indicate continued credit expansion alongside an improvement in deposit mobilisation.
Corporate Borrowing Responds to Expected Rate Hikes
Corporate bond issuances increased 1.7% year-on-year in H1 FY27, with growth accelerating to 54% in Q2 after four consecutive quarters of contraction.
CareEdge attributes the rebound partly to companies bringing forward borrowing plans to secure funding before expected interest-rate increases. However, corporate bond issuances may moderate as the cost of capital rises, while bank credit is expected to remain a preferred funding source.
Certificates of deposit (CDs) totalled Rs 2.7 trillion in Q2 FY27, up 23% year-on-year but lower than the preceding quarter. The decline reflects reduced reliance on CDs as banks benefit from stronger deposits.
Commercial paper (CP) issuances grew by 30% year-on-year in H1 FY27.
RBI Measures Support the Rupee Amid Continuing Pressure
The Indian rupee recovered to around 95 against the US dollar in mid-October from a recent record low of nearly 97. The recovery followed stepped-up RBI intervention, including a reported 25-basis-point repo rate hike to 5.50%, a dedicated dollar supply window for oil marketing companies (OMCs) and tighter regulations on rupee derivatives.
However, elevated crude oil prices, foreign portfolio outflows and high global bond yields continue to weigh on the currency.
The RBI’s net short position in the forward market has increased to around USD 200 billion. Foreign exchange reserves declined by approximately USD 60 billion from their early-September peak of USD 786 billion to USD 726 billion.
Since 12 October, the RBI has been meeting the entire daily dollar requirements of Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. The arrangement aims to reduce these companies’ direct participation in the spot foreign exchange market, although it shifts the burden onto the RBI’s reserves.
New Restrictions on Foreign Exchange Derivatives
Two RBI circulars issued on 10 October introduced measures intended to limit speculative positions and reduce flexibility in currency trading:
- Restrictions on rebooking cancelled contracts: Authorised dealers can no longer permit clients to rebook cancelled rupee-linked derivative contracts. Rollovers at maturity remain permitted.
- Lower threshold for unhedged positions: The limit for entering foreign exchange contracts without demonstrating an underlying exposure has been reduced from USD 100 million to USD 5 million.
- Higher reserve requirements for banks: Authorised dealers must maintain a cash reserve with the RBI equivalent to 20% of the rupee notional value of eligible contracts involving the purchase of foreign currency against the rupee.
These measures are intended to increase the cost of speculative positions against the rupee and limit market flexibility. Their effectiveness will depend partly on whether oil prices, capital outflows and global yields begin to ease.
CareEdge expects USD/INR to trade in the range of 94–96 by the end of FY27.
Indian Equities Lag Global Peers Amid Foreign Investor Outflows
Global equity markets were broadly flat over the preceding month, while the MSCI Emerging Markets index declined 4.8%. US indices held up, whereas the Euro Stoxx 50 fell.
Emerging markets showed divergent performance. Brazil’s Bovespa gained 10.3% during the month, while South Korea’s KOSPI declined 13% amid a correction in AI-linked chip stocks, concerns about returns on AI investment, growing Chinese memory-chip capabilities and expectations of further US rate hikes.
Indian equities underperformed several global peers. The SENSEX declined 2.7% over one month, 5.5% over three months, 6.7% over six months and 11.3% over one year. In dollar terms, the BSE DOLLEX 200 fell 3.1% over one month and 12.8% over one year, reflecting rupee depreciation.
Foreign portfolio investors (FPIs) withdrew a net USD 4.8 billion from Indian markets in October to date, following USD 6.1 billion in outflows during September, mainly from equities. In calendar 2026 to date, FPIs have withdrawn approximately USD 33.2 billion from equities and USD 26.8 billion overall.
Domestic institutional investor buying continues to provide support. However, a stronger US dollar, elevated global bond yields and high energy prices remain challenges for Indian equities.
Some optimism returned after Finance Minister Nirmala Sitharaman said she was open to hearing stakeholders’ views on long-term capital gains (LTCG) tax and securities transaction tax (STT) ahead of Budget 2027.
Market Outlook
CareEdge’s assessment points to a challenging environment shaped by geopolitical risks, elevated commodity prices and expectations of tighter monetary policy. For India, liquidity absorption, government borrowing, currency management and foreign investor flows remain important factors influencing financial conditions.
The report highlights the interconnected effects of higher energy and food prices, global interest-rate expectations, domestic liquidity measures and capital flows on inflation, borrowing costs and market performance.