BMI, a Fitch Solutions company, has projected that the Indian rupee will trade around Rs 95 against the US dollar by the end of 2026. The forecast comes amid expectations of sustained pressure on the rupee due to widening trade deficits and capital outflows.
Key Factors Behind the Forecast
The research firm highlighted several factors contributing to the rupee's depreciation. A persistent current account deficit, driven by higher import bills for crude oil and other commodities, is expected to keep the currency under pressure. Additionally, foreign portfolio outflows from Indian equities and debt markets could further weigh on the rupee.
Trade Deficit Concerns
India's trade deficit has been widening as imports, particularly of energy and raw materials, outpace export growth. BMI noted that unless export performance improves significantly, the deficit will remain a drag on the rupee.
Capital Flows and Monetary Policy
The US Federal Reserve's interest rate trajectory will also play a crucial role. If the Fed maintains higher rates for longer, it could attract capital away from emerging markets like India, strengthening the dollar and weakening the rupee. The Reserve Bank of India's intervention in the forex market may slow the depreciation but not reverse the trend.
Implications for the Economy
A weaker rupee makes imports more expensive, potentially fueling inflation. However, it could benefit exporters by making their goods cheaper abroad. BMI expects the RBI to manage volatility through periodic interventions but not to defend a specific level.
The forecast suggests that the rupee could depreciate by about 10% from current levels over the next three years. As of now, the rupee trades around Rs 83-84 per dollar.
