Rupee to average 96/USD in FY27 on oil, dollar risks: Motilal Oswal

The rupee will average about 96 against the dollar in the fiscal year ending March 2027, Motilal Oswal said Tuesday. The brokerage pointed to higher crude oil prices and a stronger US dollar as the biggest risks to that estimate.

Oil is India's largest import. A prolonged rally in crude widens the current account deficit and creates dollar demand. The dollar's broad strength pressures emerging-market currencies across the board, leaving the rupee with little support, the report said.

The Reserve Bank of India has intervened regularly through spot dollar sales and sell-buy swaps to manage the pace of depreciation, traders said. Swaps drain rupee liquidity without permanently reducing foreign reserves. The central bank has used them in recent months to counter dollar demand from maturing NDF contracts, traders said. RBI's foreign exchange reserves stood at about $600 billion as of last month, providing a buffer against sharp moves.

Foreign portfolio flows into Indian bonds and equities have been volatile. The government's recent tax changes on bonds, designed to spur foreign inflows, may help. Still, the scale has not been enough to offset trade-related dollar demand, according to market participants.

The trade deficit remains a consistent source of dollar demand. Motilal Oswal expects it to stay elevated through fiscal 2027, the report said. Households face higher costs for imported fuel and edible oils, which feed into consumer price inflation. The RBI's inflation forecasts have already factored in some pass-through. A faster depreciation would force upward revisions, analysts said.

A weaker rupee raises the cost of imported fuel and edible oils, feeding into inflation. That complicates the RBI's rate policy, which has been aimed at bringing headline inflation back to the 4% target. If the rupee slides further, the central bank may keep rates elevated, even as global peers start cutting, analysts said.

For Indian equities, the impact splits by sector. Exporters such as Infosys (Alpha Score 57, Moderate) benefit from higher rupee revenue when earnings are converted. Companies with large import bills or dollar-denominated debt face margin erosion. The rupee's path will shape relative performance across sectors.

Oil importers have been hedging their dollar exposure more aggressively after the recent rise in crude prices, adding to spot market demand, traders said.

Motilal Oswal also flagged risks from a possible slowdown in global growth and tighter US monetary policy. A faster-than-expected rate cut cycle by the Federal Reserve could lift the rupee. The base case assumes the dollar stays strong. The dollar index has strengthened on expectations that the Fed will keep rates elevated relative to other major central banks, pulling capital out of emerging markets.

The rupee's weakness mirrors that of other Asian currencies hit by dollar strength and high oil prices. The 96 level has not been tested since the early 2000s. A break above that would be a psychological milestone. The RBI's intervention patterns suggest it aims to smooth the path, not prevent it, traders said.

Motilal Oswal expects the rupee to test 96 by the end of fiscal 2027, assuming the external environment does not shift.