Axis Bank, one of India's largest private lenders, believes the Indian rupee still has room to weaken, forecasting the currency to reach about 97 per US dollar by the end of the year. The bank's economists point to two key factors dragging the rupee's “fair value” lower: elevated oil prices and softer-than-expected productivity gains from artificial intelligence.
Why the rupee is under pressure
The rupee has already been trading near record lows, recently slipping toward the 96-per-dollar mark. The currency's slide has been driven by a combination of global and domestic forces. A stronger US dollar, partly fueled by expectations of further Federal Reserve rate hikes, has put pressure on emerging-market currencies, including the rupee. As we've seen in recent sessions, the rupee's decline toward 96 was largely a response to the greenback's strength.
Oil prices are another major factor. India imports about 80% of its crude oil needs, so when global oil prices rise, the country's import bill swells, widening the trade deficit and putting downward pressure on the currency. Higher oil prices also feed into domestic inflation, which can complicate the central bank's policy decisions.
The second factor Axis Bank highlights is the productivity gains from artificial intelligence. Many investors and policymakers had hoped that AI adoption would boost productivity across economies, potentially strengthening currencies by improving growth prospects. But if those gains are proving weaker than expected, it could mean slower economic growth and less support for the rupee.
What the forecast means
Axis Bank's year-end target of 97 per dollar implies further depreciation from current levels. For everyday investors, a weaker rupee has mixed implications. On one hand, it makes imported goods more expensive, which can push up inflation and erode purchasing power. On the other hand, it can benefit Indian exporters, IT services firms, and companies that earn a significant portion of their revenue in dollars.
The rupee's trajectory will also depend on the Reserve Bank of India's (RBI) actions. The central bank has been actively intervening in the forex market, selling dollars to cushion the rupee's fall. As noted in a recent report, the RBI's dollar sales have helped counter oil and yield pressure. However, if the RBI steps back, the rupee could slide faster.
What it means for investors
For Indian investors, a weaker rupee can affect portfolios in several ways. Those with international exposure, such as US stocks or global mutual funds, may see their returns boosted when converted back to rupees. Conversely, investors holding foreign currency debt or planning overseas travel will face higher costs.
For global investors, a falling rupee can reduce the dollar-denominated returns on Indian assets. However, it can also make Indian stocks and bonds cheaper for foreign buyers, potentially attracting inflows if other conditions are favorable.
The broader market context matters too. Indian stocks have recently rebounded, with banks leading gains, but gains have been capped by concerns over the Fed and oil prices. As we've seen, Indian stocks rebounded but faced headwinds from these same factors. A weaker rupee could add to those headwinds, as foreign investors may become more cautious.
What to watch next
Investors should keep an eye on several indicators. Oil prices remain a key driver—if they continue to climb, the rupee could weaken faster than Axis Bank's forecast. The Fed's policy path is another crucial factor; any signals of further rate hikes would likely strengthen the dollar and pressure the rupee further.
Domestically, the RBI's intervention strategy will be closely watched. The central bank has a delicate balancing act: supporting the rupee without depleting foreign exchange reserves or tightening monetary conditions too much. Its actions will be pivotal in determining whether the rupee slides to 97 or stabilizes sooner.
For now, Axis Bank's forecast adds to the growing consensus that the rupee's weakness is not over. While the currency may find some support from India's relatively strong economic growth, the combination of high oil prices and disappointing AI productivity gains suggests that the path of least resistance is still downward.
As always, investors should focus on diversification and consider how currency movements might impact their overall portfolio. A weaker rupee is not inherently good or bad—it depends on your investments and financial goals.
