Indian Rupee Seen Weakening To 97 Per Dollar By FY2026-27-End: BMI

The Indian rupee is expected to weaken further against the US dollar over the next two fiscal years, pressured by elevated energy prices, global risk aversion and less favourable interest-rate differentials, while government measures to attract foreign capital should help contain the pace of depreciation, BMI, a Fitch Solutions Company, said.

BMI expects the rupee to weaken to ₹97 per US dollar by the end of FY2026-27, which runs from April 2026 to March 2027, and to ₹99 per dollar by the end of FY2027-28, from ₹95.4 currently.

The currency has already weakened by about 4% since the start of the US-Iran conflict, with higher energy prices and a broader risk-off environment weighing on the rupee, the research firm said in a note.

India's heavy dependence on imported energy is likely to remain a key source of pressure. The country imports about 90% of its oil requirements, meaning sustained increases in Brent crude prices would raise the import bill and increase demand for dollars.

"The US-Iran conflict will weigh on the rupee, although recent government measures will support FX inflows and help limit the extent of depreciation," BMI said.

The impact of higher oil prices is compounded by India's energy subsidies, which reduce incentives to curb consumption, the firm said. However, BMI expects a lasting resolution to the US-Iran conflict, which should ease some of the pressure later in the fiscal year.

The outlook for interest-rate differentials between India and the US is also becoming less supportive for the rupee.

BMI now expects the US Federal Reserve to keep its policy rate at 3.75% for the remainder of 2026 before cutting rates by 50 basis points in 2027. In India, it expects the Reserve Bank of India to raise rates by 25 basis points in February 2027, compared with its previous forecast for two hikes during FY2026-27.

The second expected hike has instead been pushed into FY2027-28, BMI said.

A potential Super El Niño weather pattern poses another risk to the currency. Meteorological experts currently assign about a two-thirds probability to the event, which could reduce agricultural exports while increasing demand for food imports.

India's substantial foodgrain reserves should provide some protection, although perishable food products could remain vulnerable to weather-related disruptions, according to BMI.

Recent rupee weakness may also reflect investor concerns over India's longer-term growth prospects, particularly the potential impact of artificial intelligence on key services export industries.

Software engineering and call-centre operations are among the Indian services sectors considered vulnerable to AI-driven disruption. BMI noted that early signs of pressure are emerging in the form of hiring freezes and fewer entry-level positions.

The risks are more pronounced over the medium to long term, however, with a strong services surplus continuing to provide support to the external balance in the near term.

Recent measures by the government and RBI should help stabilise the rupee and prevent a sharper depreciation, BMI said.

Measures to attract foreign capital include tax cuts for foreign investors, wider foreign access to India's bond markets and subsidised foreign-exchange hedging facilities.

These measures have already contributed to about $40 billion in foreign portfolio investment inflows, reversing earlier FPI outflows, according to BMI.

However, the firm does not expect Indian authorities to use these additional inflows to deliberately strengthen the rupee through direct foreign-exchange market intervention. Instead, policymakers appear focused on limiting excessive currency volatility, it said.

India's sizeable services surplus and remittance inflows are also expected to cushion the rupee by offsetting part of the country's large merchandise trade deficit.

Remittances remain one of India's largest and most stable sources of current-account inflows and are currently equivalent to nearly half of the merchandise trade deficit, BMI said. Continued outward migration is expected to support remittance inflows and help keep the current-account deficit contained.

BMI identified an escalation or prolonged US-Iran conflict as a major downside risk to its rupee forecast.

Its global team assigns a 35% probability to a US-Iran escalation scenario, which could push oil prices higher, intensify global risk aversion and increase pressure on the rupee.

A worse-than-expected El Niño could further weaken the currency by increasing food import demand, while a milder event could reduce the pressure.

India also faces the risk of higher US tariffs linked to its purchases of Russian crude. BMI said threatened tariffs of as much as 100% could weigh on India's exports and investor sentiment, particularly because the US is India's largest export market.

"An escalation or extension of the conflict presents a major downside risk to our outlook," BMI said.

The combination of higher energy costs, external trade risks and global uncertainty is therefore likely to keep the rupee under pressure, although capital inflows, remittances and India's services surplus should help prevent a more severe deterioration in the currency's external position.