Indian rupee faces prolonged pressure from oil, war and AI

LAHORE: India’s rupee faces another period of weakness, with BMI, a Fitch Solutions company, forecasting that the currency could fall to ₹97 per US dollar by the end of fiscal 2026-27 and to ₹99 by the end of fiscal 2027-28.

The forecast points to a pressure mix that extends beyond the immediate shock from the US-Iran conflict. Higher oil prices, less favourable interest-rate differentials, trade risks and concerns about artificial intelligence disrupting India’s major services exports could keep the currency under pressure even after geopolitical tensions ease.

The rupee was trading around ₹95.7 per dollar this week, after weakening to a three-week low of ₹95.75 on Wednesday. It closed at ₹95.69 on Friday, down about 0.3% for the week as oil prices rose on concerns over supply disruptions linked to the Iran war.

BMI said the rupee had already weakened by about 4% since the start of the US-Iran conflict, with higher energy prices and a broader risk-off environment weighing on the currency.

Oil remains the immediate pressure point

For now, oil is the clearest source of pressure.

Brent crude has approached $92 a barrel, gaining more than 5% over the week as the conflict continues to raise concerns about energy supplies. India imports about 90% of its oil requirements, leaving the currency particularly exposed to movements in crude prices.

The transmission mechanism is straightforward. Higher crude prices increase India’s import bill, forcing importers to buy more dollars and increasing demand for the US currency. That puts additional pressure on the rupee.

BMI said the US-Iran conflict would weigh on the currency, although measures taken by the Indian government to attract foreign capital should help limit the depreciation.

“The US-Iran conflict will weigh on the rupee, although recent government measures will support FX inflows and help limit the extent of depreciation,” BMI said.

RBI keeps a lid on the decline

The Reserve Bank of India has been repeatedly intervening as the rupee approaches the psychologically important ₹96-per-dollar level.

Traders have reported state-run banks selling dollars in the market, which they believe is being done on behalf of the RBI. The central bank has maintained a presence in the market over the past two weeks, discouraging traders from making aggressive bearish bets against the currency.

On Wednesday, a private-bank trader said the RBI had been present for most of the session as the rupee tested ₹95.75.

“They (RBI) have completely cooled it down,” the trader said, adding that exporter dollar selling also increased as traders viewed the ₹95.75 area as a potential near-term top for the dollar-rupee pair.

The intervention has helped contain volatility and prevent the rupee from breaking decisively through ₹96. But it has not removed the underlying pressure.

As long as crude remains elevated, India’s demand for dollars is likely to remain strong. The RBI can smooth the adjustment and limit disorderly moves, but it cannot eliminate the impact of a larger energy import bill.

Today’s shock, tomorrow’s risks

The immediate drivers of the rupee’s weakness are largely cyclical: oil prices, geopolitical risk, dollar demand and less favourable interest-rate differentials.

BMI, however, sees risks that could persist beyond the current conflict.

One of them is artificial intelligence.

The research firm said investor concerns about India’s longer-term growth prospects may be contributing to rupee weakness, particularly as AI begins to challenge parts of the services sector that have traditionally generated foreign exchange for the country.

Software engineering and call-centre operations are among the areas considered vulnerable to AI-driven disruption. BMI pointed to early signs including hiring freezes and fewer entry-level positions.

The impact on the rupee is unlikely to be immediate. India’s services surplus remains an important support for the external balance and should continue to provide a buffer in the near term.

The bigger risk is further out.

If AI eventually reduces global demand for Indian software and business-process services, it could weaken an important source of foreign-exchange earnings. BMI therefore sees the AI threat as a medium- to long-term risk rather than the main explanation for the rupee’s current weakness.

Trade risks add another layer

India is also exposed to potential US trade measures linked to its purchases of Russian crude.

BMI said threatened US tariffs of as much as 100% could weigh on Indian exports and investor sentiment. The risk is significant because the US is India’s largest export market.

An escalation or prolonged US-Iran conflict would add to those pressures by keeping energy prices higher and increasing global risk aversion.

“An escalation or extension of the conflict presents a major downside risk to our outlook,” BMI said.

For the rupee, that creates pressure from both sides: a higher energy import bill and a potentially tougher external trade environment.

Capital inflows provide a buffer

India is not without protection.

Government and RBI measures aimed at attracting foreign capital, along with remittances and the country’s services surplus, are expected to cushion the currency.

BMI said measures including tax cuts for foreign investors, wider foreign access to domestic bond markets and subsidised foreign-exchange hedging facilities have helped generate about $40 billion in foreign portfolio inflows, reversing earlier outflows.

Remittances also remain an important source of external support, while the services surplus helps offset part of India’s large merchandise trade deficit.

That explains why BMI’s forecast does not amount to a prediction of a sudden currency collapse.

Instead, it points to a gradual depreciation: ₹97 by March 2027 and ₹99 by March 2028.

The bigger question is what comes after ₹96

The rupee’s next move will depend largely on whether current pressures fade or become entrenched.

If the Iran conflict eases and oil prices retreat, some of the immediate pressure could unwind. But if crude remains elevated, global risk aversion persists and interest-rate differentials become less supportive, the currency could face a longer adjustment.

At the same time, investors will be watching the resilience of India’s services exports, capital inflows and remittances, while assessing whether AI begins to reshape the industries that have historically supported India’s external balance.

That leaves the rupee facing two different sets of risks.

The cyclical pressures are already visible: oil, war, dollar demand and global risk aversion.

The structural questions are harder: how dependent India remains on imported energy, how resilient its export markets prove to be, and whether AI begins to erode the services industries that have helped generate foreign exchange.

BMI’s ₹99 forecast is therefore more than a currency target.

It signals the possibility of a prolonged period of depreciation rather than a temporary sell-off.

And if those pressures persist, ₹99 could prove to be a waypoint rather than an endpoint, with the effects extending beyond the foreign-exchange market into import costs, inflation, corporate finances, exports and India’s longer-term growth outlook.