Fall in Rupee
IDFC FIRST Bank sees rupee falling to 87.25/$1 by March on muted inflows
This story was originally published at 22:34 IST on 22 July 2025
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MUMBAI – The Indian rupee is seen gradually falling to 87.25 a dollar by March, a 2.1% Decline in 2025-26 (Apr-Mar), IDFC FIRST Bank said in a resarch report Tuesday. A persistent decline in the dollar amid tariff induced threat to the world's largest economy and a decrease in the rupee's overvaluation according to the Rupee Effective Exchange Rate should prevent the rupee from declining more sharply, the report said.
"The relatively muted pace of depreciation reflects the fact that dollar weakness is expected to persist," Chief Economist Gaura Sen Gupta said. "The fiscal risks facing the US economy has only risen post the latest bill passed by President (Donald) Trump. The tariffs pose a negative risk to the US economy as consumers will have a price shock due to more expensive imports." The Indian unit closed at a near one-month low of 86.37 a dollar Tuesday.
Sen Gupta expects the balance of payment to improve to a $14 billion surplus in FY26, from a $5 billion deficit in the previous financial year. This will likely be driven by a rise in both the net foreign direct investment inflows and external commercial borrowings, the report said. External borrowings might increase as hedging costs stay low and the US Federal Reserve cuts rates by another 50 basis points in 2025, as expected.
The Reserve Bank of India's intervention in the foreign exchange market could also soak up benefits to the rupee from a weaker dollar and lower crude prices. The central bank has been gradually reducing the forward book size, to $65.2 billion at the end of May from nearly $89 billion at February-end. The RBI may have to roll over a bulk of the remaining short positions as inflows are unlikely to improve sharply, even as it tries to bring down near-term short positions.
"The combination of large negative forward book and muted capital inflows will ensure that RBI is likely to absorb capital inflows, as and when they improve," the report said. "Hence, this will limit the benefit of dollar weakness for the INR."
Unlike last year, this intervention is unlikely to flow into the spot market due to the current monetary policy easing cycle, Sen Gupta said. Since the start of 2025 the RBI's Monetary Policy Committee has cut the repo rate by 100 bps to 5.50%. To transmit the rate cut to the wider financial system, the central bank has in turn, conducted some liquidity infusion measures to ensure the systemic liquidity remains in large surplus.
"The dollar intervention will be managed in such a manner that net impact on INR liquidity would be close to neutral," Sen Gupta said. "We see this from intervention behaviour in Q1FY26 (Apr-Jun). Hence the two-way volatility which has risen since the start of 2025, is likely to persist." End
US$1 = INR 86.37
Reported by Vidhushi RajPurohit
Edited by Akul Nishant Akhoury
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