BofA Says Rupee Weakness Hurts Confidence More Than Prices

The sharp weakening of the rupee is reshaping India’s macroeconomic outlook in ways that depart from past cycles. A new report from BofA Securities suggests that the currency’s slide is likely to dent business confidence and compress imports long before it feeds into inflation. Economists Rahul Bajoria and Smriti Mehra argue that this episode is less about overheating risks and more about capital flows, policy credibility and a global backdrop that is unusually benign for prices.

The rupee has fallen almost 6% year to date against the dollar and more than 9% in real effective terms. BofA notes that this places the drop among the most pronounced depreciations seen since 2013 and 2008. Even so, India’s macro buffers do not resemble the stress points of those periods. The current account deficit remains contained because crude oil is around $15 per barrel cheaper than last year’s average and because the services surplus continues to widen.

The strain is instead visible on the capital side, as portfolio and direct investment flows have weakened, forcing the RBI to sell roughly $65 billion in the spot market between October 2024 and September 2025 while also running a short forward book of about $63.6 billion. BofA interprets this as a signal that the central bank is cushioning volatility rather than defending any explicit level, a stance reinforced by its recent policy communication.

Bajoria and Mehra write that sentiment is typically the first casualty when the rupee weakens by more than 10% in a short span. Their charts show declines in purchasing managers’ indices, softer consumer confidence and rising policy uncertainty during past episodes. In their view, a similar reaction is likely this time as the speed of depreciation becomes an independent signal for businesses and markets.

On growth, BofA finds that import compression delivers the initial macro response. A 5% depreciation in the rupee’s real effective rate tends to cut imports by about 2.3%, largely through weaker discretionary demand. This mechanism is already visible in recent trade data. Export elasticity, on the other hand, has weakened over time as India’s export basket has become less sensitive to price shifts. Even so, real depreciation can still improve the trade balance by the equivalent of $7 billion to $12 billion over a few quarters, mainly through reduced imports.

Inflation Risks
The unusual feature of this cycle is the muted inflation risk. BofA cites research showing that a 5% real depreciation can add as much as 35 basis points to inflation over three to four quarters, yet it argues that the impact in 2026 will be far smaller.

Crude oil in rupee terms is now cheaper than at the start of 2025, while state-controlled fuel pricing has created a cushion that limits the need for retail increases. Chinese producer prices remain in disinflation, which has helped pull wholesale inflation in India into negative territory for a prolonged period. These conditions blunt the pass-through from a weaker currency.

The report notes that services and remittance flows should benefit from the cheaper rupee, although the gains will not be immediate. Services exports tend to rise as offshore cost competitiveness improves, while remittances typically increase once the depreciation cycle stabilises. Tourism and overseas education outflows may soften as foreign travel becomes costlier.

Fiscal effects are mixed. Fertiliser and liquefied petroleum gas subsidies could rise as imports become more expensive, although the external price backdrop tempers the shock. More significant may be the impact on the central bank’s own income. BofA says that continued foreign exchange intervention could lift the RBI’s revaluation gains and result in a larger dividend to the government in 2025-26, creating an offset on the revenue side.

What complicates the picture is the overhang from the US-India trade dispute. Tariff-related uncertainty has already contributed to equity outflows, and BofA argues that a final agreement would be necessary to restore portfolio appetite. A revival of growth momentum would also help by supporting corporate earnings and easing valuation concerns. Until then, the rupee’s path will remain sensitive to global risk conditions and to the extent to which the central bank chooses to smooth volatility.

Bajoria and Mehra expect the rupee to appreciate mildly next year as the dollar weakens, with the currency projected to reach about ₹86 per dollar by the end of 2026. For now, the story is less about a runaway slide and more about the subtle shift in the balance of risks. The rupee is weaker, but inflation is restrained, trade is adjusting in slow motion, and policy choices are bearing more weight than usual.