A report indicates a decline of the Indian Rupee against the US Dollar to Rs 97 in the coming months, if the ongoing West Asia crisis continues. If this happens, the Reserve Bank of India (RBI) will likely need to remain flexible in its approach, according to a report by Yes Bank.
The report stated that the rupee could weaken to 97.00-97.50 against the US dollar in the first half of FY27.
"RBI will have to be open to accept higher depreciation pressures if the crisis continues. We see USD/INR at 97.00-97.50 in H1FY27, with the view altering if the war ends and oil returns to a more reasonable level of USD 65-75/bbl."
Explaining the reasons behind this outlook, the report said that the "goldilocks" phase of the Indian economy has been disrupted due to the West Asia crisis.
"With oil prices jumping, the fiscal has been opened to absorb the shock," it said, highlighting that rising global commodity prices are likely to increase production costs for manufacturers and push up retail inflation. The report also pointed out that currency depreciation could further fuel inflation.
"A 5 per cent depreciation of the INR is likely to lead to a 30-35 bps increase in headline CPI," it said.
"Growth is expected to slow due to lower domestic consumption demand as GST impact fades and with exports likely being impacted by the global slowdown," it added. Despite strong domestic fundamentals earlier in FY26 — with GDP growth averaging 7.7 per cent, retail inflation at 1.7 per cent, and CAD at 1.0 per cent — the external sector has weakened.
"Capital flows... significantly failed to finance the low CAD, leading to a BoP deficit... at USD 30.8 bn," the report said, adding that the foreign investments remained weak.
"FDI aggregated at USD 3 bn, with repatriation flows nullifying the inward flows," while "portfolio investments... saw net outflows... at USD 4.3 bn."
Looking ahead, the report projects oil prices to remain elevated, with likely scenarios averaging USD 85-95 per barrel in FY27. Under these conditions, the CAD is expected to widen to 1.6-2.0 per cent of GDP.
The report further estimates a BoP deficit of USD 44 billion if oil averages USD 85 per barrel and USD 61 billion if prices reach USD 95 per barrel.
While RBI measures such as changes in net open position rules may provide some support, the report said underlying pressures on the rupee remain strong. With imports expected to rise due to higher oil prices, India's import cover is also likely to weaken during FY27.
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