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Informist, Wednesday, Mar. 25, 2026

 

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--S&P economist:Rupee can fall to 95/$1 if crude oil prices stay at $110/bbl
--CONTEXT: S&P Global Ratings economist Vishrut Rana's comments in interview
--S&P economist: Rupee will be more stable if dollar strength abates
--S&P economist: India's FX reserves adequate at the moment
--S&P economist:Higher India growth forecast reflects strong domestic demand
--S&P economist:W Asia conflict, high energy prices pose risks to India econ
--S&P economist: Energy supply disruption a significant risk for India econ
--S&P economist: W Asia remittance flows may be disrupted, to hit India CAD
--S&P economist: See risk to FY27 fiscal deficit target from oil price shock
--S&P economist: No significant concern on India medium-term fiscal path
--S&P economist: Medium-term econ growth prospects positive for FPI flows
 

 

By Shubham Rana and Pratiksha

 

NEW DELHI – The Indian rupee is likely to fall further because of the ongoing US-Israel war on Iran, which is likely to keep crude oil prices higher and reduce remittances to India from West Asia, according to Vishrut Rana, Asia-Pacific senior economist at S&P Global Ratings.

 

The rupee could weaken further to 95 a dollar if crude oil prices stay around $110 per barrel, Rana told Informist in an interview. "On the other hand, if the US dollar strength abates, the rupee could be more stable even if energy prices are rising."

 

In S&P's base case, which assumes Brent crude oil averaging $80 a bbl in 2026, the rupee will end 2026 at 90.5 against the dollar. Thereafter, the rupee is seen falling to 92 a dollar by end-2027.

 

Crude oil prices rose to as high as $119 per bbl after the US and Israel attacked Iran. Brent crude futures for May traded around $100 a bbl Wednesday, around 38% higher than before the outbreak of the war.

 

The increase in energy prices does complicate the picture for the rupee because of the current account impact, which will be much more significant, Rana said. Remittance flows from West Asia, which are likely to be disrupted, will further put pressure on the current account, Rana added.

 

"One caveat is that in the past, over a sustained basis, we did not see that much correlation between the INR and crude import prices," Rana said. "Part of the reason is that India runs a structural deficit, so we just see a more gradual depreciation path for the currency because of various factors."

 

India has a structural current account deficit as it imports more goods than it exports, creating an inherent, long-term demand for US dollars that weakens the rupee regardless of short-term economic growth. India's current account deficit was at $13.2 billion, or 1.3% of GDP, in the quarter ended December.

 

The longer the war persists, the Reserve Bank of India's interventions in the foreign exchange market may also ease, Rana said. "In the past when we have seen oil prices go towards relatively high levels, the currency does stabilise on its regular depreciation path after a period of time," Rana said. "So that is when the central bank can probably take its foot off the pedal and become a little bit less active."

 

Since the US and Israel attacked Iran on Feb. 28, the rupee has declined around 3%. To keep the currency depreciation in check, the RBI has spent $19 billion of reserves in the fortnight ended Mar. 13, the most in a two-week period since November 2024. India had foreign exchange reserves worth $709.76 billion as of Mar. 13, which according to Rana, are adequate for the moment.

 

The war in West Asia and the surge in crude oil prices pose significant challenges to the Indian economy, Rana said. "The longer it persists, the greater the downside risk to our projection becomes."

 

S&P Wednesday raised its forecast for India's GDP growth for the financial year starting Apr. 1 by 40 basis points to 7.1%. It also raised growth projections by 20 bps each for FY28 and FY29 to 7.2% and 7.0%, respectively.

 

Rana said the upgraded growth forecast reflects the existing data that has come in over the past few months, reflecting stronger momentum of growth in domestic demand. S&P estimates GDP growth in India would be 50–70 bps lower by the end of 2026 if crude oil prices average $130 a bbl in 2026.

 

"The key challenges that we are watching out for include, firstly, energy disruption. If there is unavailability of either crude or gas supplies coming to India, we would see that as a significant economic issue," Rana said.

 

Below are edited excerpts of the interview:

 

Q. In the current economic scenario, almost a month into the Iran war, economists have started cutting their forecasts for India's growth. You, on other hand, have raised the forecast. Can you explain your broad sense of growth?

 

A. Our last projection was done in November. So there's a sizeable gap between our previous projection and now. Since then, the data for India have been on the positive side; we saw 7.8% growth for the December quarter. A large part of our forecast revision reflects some of the existing data that is coming in, just reflecting some stronger momentum of growth in domestic demand.

 

Having said that, the ongoing West Asia conflict and the escalation in energy prices pose significant challenges to the Indian economy. The longer it persists, the greater the downside risk to our projection becomes.

 

The key challenges that we are watching out for include, firstly, energy disruption. If there is unavailability of either crude or gas supplies coming to India, we would see that as a significant economic issue. Secondary to that is the effect on producer prices in the first instance where we will see an immediate impact and gradually then pass through to consumer prices.

 

Q. Given your worst-case scenario of crude oil prices averaging $130 a barrel in 2026, where would you see the rupee, considering $110 a barrel seems to be the new normal now. What is your forecast for the rupee if crude oil at $110 is the base case?

 

A. The rupee has been under pressure recently at 93 a dollar. The increase in energy prices does complicate the picture for the rupee because of the current account impact. The current account bill will be much more significant.

 

Another angle is that the remittance flows from the West Asia are also likely to be disrupted, that will further put pressure on the current account. One caveat is that in the past, over a sustained basis, we did not see that much correlation between the rupee and crude import prices. Part of the reason is that India runs a structural deficit, so we just see a more gradual depreciation path for the currency because of various factors.

 

Yes, there will be downward pressure on the rupee, but I also expect that the wider US dollar environment will be quite important.

 

So, as long as we see this risk-off scenario for emerging market currencies globally, right now we are seeing all Asia-Pacific currencies depreciate quite substantially. In that environment, we can see the rupee weakening further. It could definitely hit 95 a dollar if crude oil prices stay at $110 a bbl. On other hand, if the US dollar strength abates, the rupee could be more stable even if energy prices are rising.

 

Q. If the war continues, what are the options that the Indian government has in terms of fiscal space or policies?

 

A. It's a tricky landscape. I'm not an energy expert, but from my perspective, the public sector balance sheets will definitely be affected at state-owned enterprises, refiners, and oil majors. Also, at the central government level, we could see some impact because of the high cost of securing these supplies.

 

I think there are already efforts underway to diversify the energy imports. There's a limit to how much that can be done in certain sectors, like gas. That is my current understanding. So, it is tricky and that's why there are efforts to make sure that at least some shipments continue through the Strait of Hormuz.

 

I see gas imports being tricky, but crude oil imports may be a little bit more resilient because there's more diversification possible.

 

Q. The new GDP series itself has pushed the Centre's FY27 fiscal deficit target to 4.5%. In your view, is that achievable in the current circumstances?

 

A. In our view, the fiscal deficit trajectory is still towards gradual consolidation and, in our base case, we do anticipate that will happen. The current energy price shock does put a risk to that fiscal narrative.

 

The level of GDP in the new series is a bit lower, so that does change the picture a little bit. We're not yet significantly concerned because, in terms of the medium-term direction, we still think that the path is towards consolidation.

 

Another important thing is that the mix of spending is a little bit more favourable because it's more infrastructure and capital expenditure heavy, which is likely to have more medium-term returns.

 

Q. What kind of steps would the RBI have to take considering the liquidity issues that will arise if the war continues?

 

A. My understanding is that the RBI has been significantly active in terms of liquidity injections over the past couple of months. Liquidity injections have been very sizeable, supporting the market and the increased demand for liquidity at the banks in the risk-off case.

 

In the FX space also, there has been activity in the non-deliverable forwards market offshore to support the rupee. That is likely to continue. There may be some outright sales of reserves. There are adequate FX reserves for the moment.

 

The longer the war persists, I think the calculus will change for the central bank in terms of how it deals with the FX shock. In the past, when we have seen oil prices go towards relatively high levels, the currency does stabilise on its regular depreciation path after a period of time. So that is when the central bank can probably take its foot off the pedal and become a little bit less active.

 

Q. The foreign portfolio investment scenario for India has been going from bad to worse, and this crisis has only added to that. Would you say that, if this continues, we are looking at a huge chunk of FPI flows going from India or are there other factors that may help us?

 

A. Net FPI flows have indeed been negative last year and look to be the same this quarter, although the data is not yet out. Medium-term, I think the stronger growth prospects of the economy and the gradual opening up of markets to FPI investors should be positive for FPI investors over the medium horizon. I do not see concerns on that front. Free trade agreements that have been signed recently improve aspects that are related to investment, so that will also support.

End

 

US$1 = INR 93.97

 

Edited by Akul Nishant Akhoury

 

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