Oil Price Surge Threatens Indian Rupee Rally

The Indian Rupee's recent rally has hit an obstacle in the form of rising oil prices. According to MUFG, USD/INR is expected to rise from around 94.7-94.8 to 95.50 this year and 96.50 by Q2 2027, despite stronger RBI support.

The Rupee weakened to around 94.7-94.8 per Dollar on Tuesday as Brent crude approached $98 and foreign investors resumed selling Indian assets. State-run banks were seen selling Dollars around 94.70 on Tuesday, extending a sustained period of intervention by the Reserve Bank of India.

Despite the RBI's efforts to support the Rupee, MUFG notes that existing foreign-currency inflows have enlarged India's external buffer and curtailed the risk of sharp INR depreciation. However, the removal of incremental liquidity support, accelerating credit growth, and the lagged inflationary effects of earlier oil-price increases point towards higher INR rates.