CareEdge Ratings has said that the Indian rupee’s breach of the Rs 95 per dollar mark this week shows a paradox, where a weaker US dollar has not translated into currency strength for India as oil prices, capital outflows and trade pressures overwhelm supportive fundamentals.
The rupee opened at Rs 95.01 on Thursday and slid to a record low of Rs 95.20 in early trade, down 32 paise from its previous close, as crude prices climbed amid escalating tensions between Washington and Tehran and safe-haven demand lifted the greenback. The dollar index was last at 98.96, marginally higher, after hawkish commentary from policymakers at the Federal Reserve reinforced US bond yields following a status quo decision led by Jerome Powell.
Yet, CareEdge’s April debt and forex market update argues the rupee’s weakness predates this latest bout of dollar firmness and reflects deeper external and capital account strains.
The agency notes that the dollar index has depreciated since early 2025 on US fiscal concerns and de-dollarisation debates. Historically, such phases would have supported emerging market currencies. However, USD/INR has depreciated by about 4 per cent since the onset of the West Asia crisis, even as the broader dollar trend softened.
This divergence, the report says, indicates that India-specific external vulnerabilities, particularly oil dependence and capital flow volatility, are outweighing any benefit from dollar weakness. Forward market signals reinforce this view. Interbank USD forward premia have risen sharply, suggesting market expectations of further rupee weakness.
Oil At Centre Of Currency Stress
A key driver is crude. Drawing on projections from the U.S. Energy Information Administration, CareEdge highlights that Brent is expected to peak at USD 115 per barrel in Q2 2026 and remain above USD 90 until late in the year due to a persistent geopolitical risk premium.
For India, which imports over 80 per cent of its oil needs, this feeds directly into a widening merchandise trade deficit. CareEdge projects India’s merchandise trade deficit to widen to USD 422 billion in FY27, levels seen only in earlier oil shock episodes such as FY12, FY13 and FY23 when crude averaged close to USD 100 per barrel.
Higher oil prices inflate import values even if volumes remain steady, putting sustained pressure on the current account and, by extension, the rupee. In previous stress episodes, stable foreign direct investment cushioned balance of payments strains. CareEdge says this pattern has broken in FY26.
Net FDI inflows fell to just USD 6.3 billion in the first eleven months of FY26, sharply lower than the five-year average of USD 35.1 billion, as repatriation of profits and outbound investments by Indian firms surged. Foreign portfolio investment flows have also remained volatile. Outflows eased from USD 13.6 billion in March to USD 7.5 billion in April but remained negative amid global uncertainty, high oil prices and rupee weakness.
As a result, India’s balance of payments recorded a deficit of USD 30.8 billion in the first nine months of FY26 versus a USD 5 billion deficit in all of FY25, signalling that capital inflows are no longer offsetting trade pressures. Paradoxically, CareEdge argues the rupee appears undervalued on real effective exchange rate metrics.
The US–India 10-year interest rate differential widened from about 190 basis points in May 2025 to around 260 basis points by mid-April 2026. Normally, such a widening would attract carry flows and support the rupee. Instead, the currency weakened from around 85 to above 93 in the same period. From a REER perspective, the rupee remains below its long-term average band, suggesting valuation does not explain the weakness.
RBI Intervenes Via Forward Book
The Reserve Bank of India has responded by leaning heavily on the derivatives market rather than spot reserves, CareEdge says. The central bank’s net forwards and futures position has risen significantly, with 63.2 per cent of forward short positions maturing beyond one year. This indicates efforts to smooth volatility without immediate stress on forex reserves.
This strategy, the report suggests, is aimed at containing disorderly movements rather than defending any specific level. Domestic macro signals add to currency fragility. Manufacturing and services PMIs fell to multi-month lows in March, while core sector output contracted 0.4 per cent, the weakest in nineteen months. Consumer confidence indices for both rural and urban segments slipped into pessimistic territory.
Retail inflation rose to 3.4 per cent in March, with risks from higher fuel costs and forecasts of below-normal monsoon rainfall. CareEdge projects CPI inflation to average 4.5–4.7 per cent in FY27 if crude averages USD 90 per barrel. Government finances also face strain. The fiscal burden from excise cuts on fuel, higher subsidies and weaker tax collections is estimated at around 0.5 per cent of GDP in FY27.
Meanwhile, G-sec yields have risen across tenors amid borrowing pressures and oil risks, with the 10-year yield expected to average 6.8–6.9 per cent over FY27. One mitigating factor is service exports. CareEdge expects services exports to grow 9.5 per cent in FY27, continuing to offset part of the merchandise trade deficit through a healthy services surplus. However, this buffer is insufficient to fully counterbalance oil-driven trade gaps and weak capital inflows. Assuming crude averages USD 90 per barrel, CareEdge projects USD/Indian rupee to average between Rs 92 and Rs 93 in FY27, implying that current levels may persist rather than reverse sharply.
