Bets on a sustained recovery for the Indian rupee, once fueled by expectations of tens of billions of dollars in fresh capital inflows, have all but vanished as crude oil prices resume their ascent. A more than 20% jump in crude in just two weeks has prompted leading analysts to forecast fresh lows for the Indian currency against the dollar, undermining recent efforts by the Reserve Bank of India (RBI) to stabilize the market.
The rupee has already slid approximately 2% from its June high and is currently hovering near a record low. Analysts from Danske Bank AS and Ebury Partners Ltd. are now predicting further depreciation. This downturn has largely negated the impact of a central bank-led policy blitz designed to attract foreign capital, which Citigroup Inc. had estimated could fetch as much as $80 billion.
India’s Energy Vulnerability Amplified
India’s deep reliance on imported energy renders its currency particularly vulnerable compared to many of its Asian peers. The ripple effects of soaring crude prices are far-reaching across the broader economy. Concerns over an energy shock, intensified by the US-Iran conflict, are back on traders’ radar. A weaker rupee is expected to fan inflationary pressures, escalate subsidy costs for the government, squeeze corporate profit margins, and widen the nation’s current account deficit.
Barry Van Der Laan, a senior FX strategist at Monex Europe Ltd. and ranked second among Bloomberg’s top rupee forecasters, articulated the prevailing sentiment. “Unless oil risk fades decisively and portfolio inflows become more durable, we think the path of least resistance remains modest rupee depreciation into year-end,” Van Der Laan stated.
RBI Interventions Face Uphill Battle
The Reserve Bank of India did step in on Monday, intervening to support the rupee as it approached the record low of 96.9650 reached on May 20. However, the central bank’s ability to prevent further slides may be limited. Van Der Laan suggests that the RBI can, at best, smooth the rupee’s trajectory, forecasting the currency to hit 98 per dollar by year-end.
One of the RBI’s key strategies involved drawing tens of billions of dollars in foreign currency deposits from India’s 35 million diaspora. Despite banks offering attractive rates, such as 7.75% on five-year deposits with 19 times leverage, some investors remain on the sidelines. As of July 17, banks had mobilized approximately $17 billion through this initiative. While such capital flows can bolster the central bank’s reserves, allowing for intervention against acute rupee weakness, the depletion of its reserves in recent years will constrain its capacity for more aggressive action, according to Abbas Keshvani, Asia macro strategist at RBC Capital Markets Ltd.
Fading Foreign Interest and Global Headwinds
An ominous sign for the rupee is the emerging trend of fading foreign interest in Indian assets. Overseas funds were net sellers of $690 million in stocks last week, and their purchases of index-eligible bonds have also moderated significantly from the surge observed after a tax waiver last month.
This trend is likely to persist given the outlook for further rate hikes by the US Federal Reserve later this year. Such hikes would narrow bond yield differentials, making Indian assets less attractive to foreign investors. Additionally, Indian equities currently lack significant investment opportunities linked to the artificial intelligence boom, which has powered recent global stock rallies.
David Forrester, senior strategist and economist at Credit Agricole CIB, highlighted these challenges. A sustainable rebound in the rupee is difficult “while there is potential for the Fed to hike rates later this year as well as investors remaining concerned about the growth potential in India’s IT and professional business services sectors in the face of advances in AI,” Forrester noted.
Ultimately, analysts view the Indian authorities’ measures as more of a temporary fix than a lasting solution. Glenn Yin, research director at broker ACCM in Melbourne, summarized the underlying structural challenges: “The underlying challenge for rupee remains unchanged — India still runs a structurally oil-sensitive external account while competing for capital in a world where US yields remain elevated, and the fact that global investors are increasingly selective.” The combination of persistent oil price volatility, global monetary tightening, and a more discerning investor base suggests a challenging path ahead for the Indian rupee, with its rebound prospects now largely extinguished.
