Rupee at risk? BOP pressure, oil shock and capital flows hold the key, says Rahul Bajoria

India’s currency outlook is once again under scrutiny, with projections indicating the rupee could weaken to 94 against the US dollar by mid-2026. The backdrop: rising oil prices, a widening current account deficit, and fragile global capital flows.

Speaking to ET Now, Rahul Bajoria from BofA Global Research explained that while the forecast predates recent RBI measures, the core concern remains intact.

“So, I would say the numbers were done before the RBI came out with the measures… the main underlying issue remains with the balance of payments… we will run with a small BOP deficit… which can very well take us back towards 94 levels… we should kind of stabilise around 93 levels… but there is significant uncertainty about any spot projections.”

A Growing External ImbalanceIndia’s external position is becoming increasingly stretched as higher energy prices push up the current account deficit.

“No, absolutely… the most fundamental challenge… is how the external balances are set up… with the widening in the current account deficit… there is still going to be a challenge as to how do we attract capital… measures to increase capital inflows… should be the core focus… to stabilise the currency.”

RBI’s Balancing ActThe Reserve Bank of India, Bajoria noted, is less concerned about defending specific levels and more focused on preventing disorderly moves.“RBI… do not really track any particular levels… they are more worried about the pace and intensity… if there is a current account widening, the RBI would let the rupee adjust… 94-95… they would probably be okay… what matters more is attracting capital inflows going ahead.”Capital Flows: The Swing FactorRecent outflows, he said, reflect a broader global trend rather than India-specific weakness.

“A lot of the capital outflows… are just funds lightening risk… we have seen outflows across emerging markets… we are not being singled out… in the half of the year we are looking for capital flows to make a return… but the real question mark is… is that going to be enough.”

Rate Hikes: Not a GivenOn monetary policy, Bajoria emphasised that rate hikes depend on whether the shock is inflationary or growth-related.

“So, I would not say it is a given… it depends on whether this manifests into a growth shock or an inflation shock… if it is an inflation shock… there is a case for some monetary adjustment… but if growth slips below 6.5%… I am not entirely sure the RBI would be comfortable hiking rates.”

Inflation Risks: Limited DownsideWhile food prices have softened recently, risks may still tilt upward due to fuel and global factors.

“So, the downside risk is coming from high-frequency prices… vegetable and cereal prices… have been moving lower… but a potential fuel price hike… and global El Nino conditions… make me think downside risks are limited… there is going to be some upside risk.”

The Bottom LineThe rupee’s path will depend on how oil prices, capital flows, and policy responses evolve. Near-term pressure may persist, but stability could return if global conditions improve and inflows pick up. For now, uncertainty continues to dominate the outlook.