The rupee is expected to trade broadly sideways and end 2026 at around INR95 per US dollar, with bearish and bullish factors balancing each other out, said a report. This is anticipated due to the US-Iran conflict, which has added pressure on emerging market currencies, especially those of large energy importers like India. The rupee depreciated 4% during March-April 2026, trading at INR95.20 against the US dollar.

According to a report on the outlook for the Indian rupee by BMI, a unit of Fitch Solutions, pressure on the rupee is expected to continue in FY2026/27 due to stress on the current account, heightened global uncertainty, and a slower pace of rate cuts by the US Federal Reserve. The Iran conflict is likely to widen India’s current account deficit by 0.4 percentage points to 1.3% of GDP in the new fiscal year, mainly because of the country’s dependence on energy imports, it said. Energy imports accounted for 22% of total imports in FY2025/26 and are expected to rise in FY2026/27.

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The conflict could also worsen the deficit by reducing remittance income, it mentioned. Around 38% of India’s remittance inflows in 2025 came from Gulf countries, amounting to about 1.0% of GDP. If the conflict affects incomes of Indian workers in the Gulf, the current account deficit could widen beyond current forecasts.

Financial portfolio outflows are also expected to keep the rupee under pressure in FY2026/27 as risk aversion towards emerging markets rises. While India’s local policy uncertainty index fell sharply in March, possibly reflecting the India-US trade deal signed in February, the global uncertainty index rose during the same month. This indicates that emerging market currencies could remain under strain, it argued. 

With policy uncertainty elevated due to the Iran war and tariffs, net portfolio inflows are expected to stay subdued. Data from the Institute of International Finance showed capital outflows of USD13.4 billion from India in March, the largest single-month outflow since the pandemic.

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The outlook for US rates has also changed. Rising energy prices pushed US inflation up to 3.3% year-on-year in March. The Federal Reserve is now expected to cut its policy rate by 25 basis points in 2026 instead of 50 basis points. Risks are tilted towards no Fed rate cuts. Meanwhile, the RBI has just concluded its monetary easing cycle and is expected to be reluctant to raise its policy rate immediately despite possible inflation risks. This means interest rate differentials may no longer move in the rupee’s favour as previously expected, while a stronger US dollar could remain supported for longer.

Nevertheless, some supportive factors are expected to limit the rupee’s losses. 

Profit repatriation from India is believed to have peaked in the third quarter of 2025, and both profit repatriation and divestments have trended lower since then. As these contributed significantly to outflows over the past two years, their slowdown is expected to ease some pressure on the currency, the report added. 

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The RBI is also expected to continue intervening in the market. The rupee has fallen 10% over the past 12 months, and the last comparable decline between January and December 2022 led to aggressive RBI intervention and a 13% fall in foreign reserves to USD498 billion. With reserves covering seven months of imports, the RBI is expected to use its resources to counter sentiment-driven outflows and stabilise the rupee. In the week after the conflict began, the central bank reportedly spent USD12 billion in foreign exchange to defend the rupee.

Published on: May 7, 2026 7:00 AM IST