Rupee Forecast: Struggles Against Dollar as Oil Prices and U.S. Yields Pressure Currency Stability, ETBFSI
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The rupee has recovered from its May low of 96.96 to around 94.3 but remains about 6% weaker year-to-date. Crude oil near $70-90 range and earlier spikes continue to keep India’s trade deficit elevated. Persistent foreign portfolio outflows remain a key drag on capital inflows and currency stability. RBI’s FCNR(B) swap window offers only temporary support, while a strong dollar and high US yields cap gains. |
The rupee, which recovered from its all-time low of 96.96 against the US dollar in May to around 94.3, remains under pressure despite intermittent relief from global and domestic factors. The currency is down about 6 per cent year-to-date and has weakened against a broad basket of developed and emerging market currencies.
In the short term, the rupee is expected to remain volatile within a 94–96 range, with occasional appreciation attempts towards 93–92.5 under favourable conditions. However, this strength is likely to be temporary, with the broader trajectory pointing back towards 95–97 levels as external pressures reassert themselves.
A key driver of recent currency movement has been crude oil prices, which influence India’s import bill significantly. Brent crude had spiked earlier in the year on geopolitical tensions, sharply widening the trade deficit by raising import costs. While oil prices have eased from peaks above $100 to around the $80 zone, they are expected to remain range-bound between $70 and $90, limiting meaningful relief to India’s external account. As a result, the improvement in the trade deficit is likely to remain modest.
Foreign portfolio investor flows have added another layer of pressure. Sustained net outflows from Indian equities over the past year have weakened capital inflows, reducing support for the rupee even during periods of lower commodity prices. The continued selling trend remains one of the most significant structural headwinds for the currency.
Policy measures
On the policy front, the Reserve Bank of India’s FCNR(B) swap window, open from June to September, is expected to temporarily support inflows by attracting non-resident deposits. While a similar measure in 2013 led to sharp inflows and rupee appreciation, the current global environment is markedly different, with US interest rates significantly higher and dollar assets offering stronger returns. This limits the durability of such inflow-driven support.
The external environment continues to favour the US dollar. The dollar index remains above the 100 mark, supported by resilient US economic data and expectations of sustained interest rates. US two-year Treasury yields around the 4 per cent level further reinforce demand for dollar assets, reducing appetite for emerging market currencies, including the rupee.
Technical indicators also point to consolidation rather than a sustained directional move. The rupee faces immediate resistance around 94, with potential appreciation toward 93–92.5 if momentum improves. However, repeated reversals from these levels suggest a lack of strong follow-through buying, with the currency likely to drift back toward 95–97 over time.
While lower oil prices and RBI measures may provide intermittent relief, the rupee’s outlook remains constrained by structural factors including dollar strength, elevated US yields and persistent capital outflows.
