Indian Rupee: External shocks pressure currency outlook – Commerzbank

Commerzbank analysts Charlie Lay and Moses Lim argue that the Rupee remains vulnerable to external shocks, notably Middle East tensions, higher energy costs and El Nino-related risks. They stress India’s heavy reliance on imported Oil, the drag from softer exports and lingering US trade risks, but also point to resilient domestic demand and substantial FX reserves supporting INR over the coming quarters.

Energy, monsoon and trade risks dominate

"The Middle East conflict continues to weigh disproportionately on the Indian rupee due to the country’s heavy reliance on imported energy, increasing pressure on inflation and the external balance. Although growth surprised to the upside at 7.7% in FY2025-2026, the economy is expected to moderate to around 6.5% in FY2026-2027 as higher oil prices, geopolitical uncertainty, supply chain disruptions, and lingering US tariff risks weigh on activity."

"However, the economy faces several external headwinds. Exports are likely to soften amid elevated global uncertainty, supply chain disruptions arising from the Middle East conflict, and higher global commodity prices. While trade risks have eased following the US Supreme Court's ruling against the IEEPA tariffs, India remains subject to Section 301 investigations."

"A growing downside risk is the El Nino weather pattern, which is expected to bring warmer and drier conditions. The Ministry of Earth Sciences projects monsoon rainfall at around 90% of its historical average. A weaker monsoon could reduce crop yields and increase fuel demand as farmers rely more heavily on irrigation pumps, adding upward pressure to both food and fuel inflation."

"More recently, RBI and the government announced a coordinated package of measures aimed at strengthening the balance of payments through higher foreign capital inflows. These include tax exemptions on foreign investment in government bonds, expanded foreign access to sovereign debt, a subsidised FCNR(B) deposit scheme, and a concessional FX swap facility for state-owned firms. Estimates suggest the measures could attract USD30-50bn of inflows over the next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)