USD To INR Forecast: The Rupee Has Rebounded, But Losses Ahead?

USD/INR Falls Below 95.20 as Markets Weigh India’s Inflation Rise

MUFG sees oil costs weighing on the Indian Rupee against the US Dollar despite RBI tightening, even as the currency recovers from its recent lows.

The Indian Rupee extended its recovery on Tuesday, taking the USD/INR exchange rate down to 95.1959 at the time of writing, as new data showed September inflation accelerating to 5.54%.

The US Dollar was 0.59% lower against the Indian Rupee on the day.

MUFG’s latest forecasts nevertheless project USD/INR at 96.00 in the fourth quarter of 2026 and 97.50 in the third quarter of 2027.

Those projections predate Monday’s inflation release.

Image: USD to INR exchange rate intraday chart.

Inflation has arrived close to MUFG’s preview assumption

India’s official September CPI release, published on Monday, put annual inflation at 5.54%, with food inflation at 7.74%.

The result broadly matches the consensus reading around 5.5% cited in MUFG’s preview.

Michael Wan had already questioned how much additional interest-rate support was available to the Rupee:

“A stronger CPI print would reinforce expectations for further RBI tightening, although one-year onshore OIS above 6.20% suggests markets already price a comparatively aggressive path. India’s 2-year government bond yield spread over the US widened by 32bps this week, which may offer some near-term carry support, but elevated oil prices and a firmer USD should keep INR under pressure.”

These swaps reflect expected short-term interest rates.

The RBI’s 7 October decision raised the repo rate by a quarter-point to 5.50% and shifted its stance to calibrated tightening.

That stance permits a further increase or a pause, with the next decision dependent on the evolving growth and inflation outlook.

MUFG’s central-bank team wrote before the inflation release:

“With the RBI sounding hawkish and concerned about inflation pressures, we expect a further 25bp hike in February 2027, taking the repo rate to 5.75%. Markets are now pricing about 2 more hikes over the next 12 months.”

That forecast allows the RBI to pause in December.

Oil imports can outweigh the yield support

MUFG’s account of the period following the RBI meeting helps explain its longer-term caution, even though the currency has since recovered:

“INR remained under pressure above the 96 level despite the RBI hike as persistent USD strength, elevated US Treasury yields and oil prices above $100/bbl continued to weaken the external backdrop for a major energy importer. USD/INR moved higher after the decision, while local rates had already priced a comparatively aggressive tightening path. The rupee likely to remain sensitive to oil prices, US yields and importer demand even as the RBI’s expanded intervention capacity limits disorderly depreciation.”

The forthcoming trade figures will also reflect seasonal demand, MUFG’s preview says: “The trade deficit is also expected to widen as higher oil prices and festive demand for gold lift imports, keeping INR sensitive to commodity prices and the broader USD.”

Higher Indian rates can improve the return on Rupee assets without eliminating that commercial demand for foreign currency.

The scope for the RBI to limit abrupt losses without reversing depreciation also underpinned its earlier assessment of India’s larger foreign-exchange buffers, which continued to allow for depreciation despite stronger reserves.

MUFG identifies the external risks:

“US yields, oil prices and risk sentiment should therefore remain the principal global drivers for Asia FX, with any renewed rise in yields or energy costs likely to weigh broadly on the region’s net oil importers.”

Foreign bond demand offers a partial counterweight: MUFG recorded $608mn of inflows into India in its latest weekly review after outflows the week before.

The report’s equity data still showed net foreign selling in India, however, so the improvement in bonds did not represent a general return of overseas investors.