Rupee May Rally to 92/$1 Before Returning to 95 by March

The rupee could strengthen toward 92 per dollar by September or December as lower crude prices and policy-led foreign currency inflows improve India’s external account, before weakening back toward 95 by March 2027 as the Reserve Bank of India absorbs inflows into reserves, QuantEco Research said in a note.

The economics research firm said the immediate external outlook had improved sharply after the US-Iran memorandum of understanding signed on June 17 helped revive shipping traffic through the Strait of Hormuz and unwind the war-risk premium in crude oil. Brent crude has corrected to around $70-75 per barrel from $124 at the end of April and $93 at the end of May, prompting QuantEco to cut its 2026-27 average Brent forecast to $80-85 from $95 earlier.

The rupee has already benefited from the shift in the external backdrop and domestic policy measures announced this month. QuantEco said the Indian currency had strengthened 1.3% since the Jun 5 balance-of-payments support package, outperforming key developed- and emerging-market peers, while volatility had moderated alongside the fall in crude prices.

The expected currency gains, however, may not be linear. 

A balance-of-payments surplus alone was not sufficient for sustained rupee appreciation, especially as the RBI was likely to absorb special foreign currency inflows into reserves, QuantEco said. 

The research firm expects the rupee to strengthen toward 92 by September or December before moving back toward 95 by March 2027.

The firm estimated the rupee was about 9% undervalued as of May, the widest undervaluation it has seen, creating room for a reversal. Still, the relief rally could be capped by a supported dollar, expectations of a turn in the Federal Reserve’s policy cycle and a reduction in the Fed’s balance sheet under new Chair Kevin Warsh, QuantEco said.

External Account
India’s external account is now expected to improve sharply. 

QuantEco projected the current account deficit at 0.9% of GDP in 2026-27, compared with its earlier estimate of 1.8%, and expects the overall balance of payments to swing to a surplus of $70 billion from a previously neutral view.

The improvement rests partly on lower oil prices and partly on the RBI’s expanded version of its 2013 playbook. QuantEco said measures to incentivise foreign debt flows through FCNR(B) deposits, external commercial borrowings and offshore foreign currency borrowing could attract about $75 billion of inflows, including $45 billion through FCNR(B), $20 billion through ECBs, and $10 billion through offshore foreign currency borrowings.

Managing those inflows will become the next policy challenge. QuantEco estimated core money-market liquidity could rise to nearly 10 trillion rupees by September or December from 4.9 trillion rupees at the end of May, far above the RBI’s usual comfort zone. It expects the central bank to absorb excess liquidity through swaps, long-term variable-rate reverse repo auctions and Market Stabilisation Scheme securities.

Interest Rates
For government bonds, the near-term picture is supportive but not one-way. QuantEco said the 10-year government bond yield had declined 25 basis points since the Jun 5 policy measures, while record foreign portfolio inflows into debt and tax exemptions for overseas investors had improved demand conditions.

Foreign portfolio inflows into debt touched a record $5.6 billion in June so far, helped by capital gains and withholding-tax exemptions and easier access to government securities, QuantEco said. The firm expects foreign investors to partly substitute for RBI open-market purchases later in the year.

QuantEco expects the 10-year government bond yield to fall to 6.75% by September before rising toward 7.25% by March 2027, as inflation pressures and fiscal concerns return to the foreground. State borrowing, the likely rollout of the Eighth Pay Commission in 2027-28 and state-level cash transfers are expected to weigh on the long end.

The firm also expects the Monetary Policy Committee to begin a modest rate-hike cycle in the second half of 2026-27, raising the repo rate by 25-50 basis points to 5.50%-5.75% by March. It said real policy rates appeared low relative to earlier growth phases and that the RBI may need to avoid falling behind the curve.

Inflation remains a key constraint for bonds. 

QuantEco lowered its 2026-27 CPI inflation forecast to 5.1% from 5.5% because of softer crude prices, but still expects inflation to rise from 2.1% in 2025-26 due to the earlier energy shock, weak monsoon conditions and the lagged impact of past rupee depreciation. WPI inflation is projected at 10% in 2026-27.

The monsoon has become the largest domestic risk. QuantEco said cumulative rainfall was 42% below normal as of June 29, with El Niño conditions threatening agricultural output, rural demand and food inflation. The firm estimated that crop gross value added could contract by about 1% in 2026-27, while overall agriculture GVA may remain only marginally positive.

QuantEco raised its 2026-27 GDP growth forecast to 6.4% from 6.2%, reflecting the relief from lower crude prices, but still sees growth slowing from 7.7% in 2025-26. It said the impact of the Middle East crisis was likely concentrated in the first quarter, with some spillover into the second quarter through weaker manufacturing, fuel consumption and core-sector indicators.