Rupee likely to resume slide as foreign outflows keep pressure on currency

The Indian rupee is likely to give up its recent gains and slip again over the next few months, according to most FX strategists polled by Reuters, as a volatile external environment ​continues to pressure the currency.

The median forecast of 37 strategists polled between November 2 ​and 4 was for the rupee, currently trading near 94.70 per dollar, to weaken to 96.00 by end-January ‌and 96.33 by end-April.

The forecast suggests pressure from higher oil prices on India, the world's third-largest energy importer, and from record foreign investor outflows is unlikely to fully subside despite a weaker US dollar and Reserve Bank of India interventions and policy measures.

The local currency, which is down 5% this year, hit a record low of 96.96 in May. It touched a two-week high on Wednesday as US Democrats captured majorities in both the Senate and House.

"We don't really see FII (foreign institutional investors) equity or the trends in capital flows changing meaningfully in the near term, and that will remain a pressure point for the rupee ... and that's why we have this slight depreciation bias," said Upasana Chachra, chief India economist at Morgan Stanley.

While strategists in the same global Reuters FX poll broadly expect the US dollar ‌to weaken in coming months, they said it will likely prove more resilient than forecast.

"When global financial conditions (are) tighter, it is going to be harder for India and probably other emerging markets to attract capital," said Chachra.

BofA, the most bearish forecaster in the poll, has maintained its call since at least August for the rupee to weaken to 99 per dollar in 12 months. Morgan Stanley estimated the rupee would fall to a record low in early 2027.

Still, none of the respondents expected it to breach the psychologically important 100-per-dollar mark.

The RBI's intervention strategy has depleted some critical buffers. Foreign exchange reserves have fallen ​to $719.75 billion, while forward dollar liabilities have climbed to a record $239.2 billion.

"These USD/INR levels are artificially held up ... this is not ‌like a normalised market where we are seeing rupee appreciation; it's only a temporary phenomenon," said Anitha Rangan, chief economist at RBL Bank.

The central bank does not target a specific USD/INR level and says it intervenes only ​to curb excessive volatility. ‌However, the rupee has closed near 95 per dollar for most months this year, largely due to regular RBI intervention.

"It is ‌very, very clear that (the RBI) wants the rupee somewhere around 95 levels," said Anil Bhansali, head of treasury at Finrex Treasury Advisors.

The RBI's latest measures have also raised the cost of hedging against future currency losses, potentially making foreign ‌investors ​more cautious about ​committing capital to India.

"FII re-entry has become that much more difficult. So, in some sense, RBI policy has stabilized the rupee at the cost of both FII flows and forward prices," said Apoorva Javadekar, chief economist ‌at Shriram Group.