Whalesbook
Rupee Under Pressure from Geopolitical Tensions and Capital Outflows
The Indian rupee is experiencing strong downward pressure as global investors increasingly expect it to weaken further. Several international financial firms, including Aberdeen Investments, MetLife Investment Management, and Gamma Asset Management SA, suggest the currency could fall to 100 against the U.S. dollar. This outlook is largely due to ongoing conflict in the Middle East, which is increasing India's oil import costs and leading investors to seek the safety of the U.S. dollar.
Rajeev De Mello, a portfolio manager at Gamma Asset, pointed out the psychological importance of the 100 per dollar level, stating, "The rupee remains vulnerable to further depreciation, and 100 against the dollar is an important psychological threshold that investors will increasingly focus on." He added, "The most immediate catalyst for a break of the level would be another leg higher in oil prices."
Compounded Pressures on the Currency
Even before the escalation of Middle East tensions, the rupee faced challenges. Wider external balances and substantial outflows of foreign funds had already weakened the currency. The recent surge in oil prices has intensified these pressures, fueling speculation about further declines.
For international funds invested in Indian stocks and bonds, currency depreciation can quickly erase gains made in local markets. Data shows that global funds have invested only $1.3 billion in local index-eligible debt year-to-date in 2026, while divesting a record $23 billion from Indian stocks.
Shifting Forecasts and Central Bank Action
Talk of the rupee reaching 100 gained momentum after it quickly passed the 95 and 96 levels. Traders reported the currency neared the 97 mark on Wednesday before intervention by the Reserve Bank of India (RBI) helped reduce losses. The rupee has depreciated over 7% year-to-date, significantly exceeding the RBI's usual acceptable annual depreciation of 3% to 4%, which it considers normal given India's higher inflation compared to other countries.
In response to these pressures, economists are adjusting their rupee forecasts. Kotak Mahindra Bank now expects the rupee to trade between 93 and 99 per dollar. Australia and New Zealand Banking Group revised its year-end forecast to 97.5 from 93, while HSBC Holdings Plc lowered its target to 95.5 from 93.5. DBS Bank raised its forecast range to 95-100 from 90-95, and Citigroup Inc. suggests the currency could reach 98 in the short term.
Divergent Views and Investor Stance
Despite the generally negative sentiment, not all market participants anticipate a continuous fall. Amundi Investment Institute believes that Asian currencies have become more attractive after their declines, potentially setting up a rebound. Alessia Berardi, global head of macroeconomics at Amundi, suggests "There is more upside surprise eventually on the appreciation side."
However, the significant depreciation has worried investors already concerned about potential interest rate hikes by central banks, including the U.S. Federal Reserve. Higher rates typically strengthen the dollar and pressure emerging market currencies. Both Aberdeen and Gamma Asset maintain an underweight position on the rupee, and Neuberger Berman Group LLC is not adding new positions. Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen, noted their bearish stance is based on expecting "higher for longer oil, which naturally is negative for India."
Investors are watching closely to see how the RBI might respond if the rupee nears the 100 mark. While the central bank has stated it prefers to smooth volatility rather than defend a specific level, some market watchers believe a rapid decline could prompt more forceful intervention.