More Stories

Informist, Wednesday, Mar. 25, 2026

 

MUMBAI – The downward pressure on the rupee could increase further if the crude oil prices remain elevated due to the prolonged war in West Asia, IDFC Bank said in a report Wednesday. To tackle the situation, the Reserve Bank of India is effectively navigating the "impossible trinity" - balancing exchange rate stability, capital flows, and domestic monetary policy - as this will give the central bank more flexibility in monetary policy and in maintaining foreign reserves.

 

Under the current scenario, India's current account deficit is projected to widen to 2.6% of GDP in 2026-27 (Apr-Mar) from 1.6% projected earlier, driven by a higher import bill. Funding the deficit remains a concern, with persistent capital outflows already weighing on the balance of payments, economists at IDFC Bank said. India's balance of payments deficit for FY26 is expected to be $35 billion, which could widen further to around $40 billion in FY27 if the West Asia crisis continues. In such a situation, the RBI may have limited room to defend the currency aggressively and could allow a calibrated depreciation of the rupee to preserve reserves.

 

The report noted that RBI's management of reserves and forward positions will be critical in containing currency volatility, especially as higher oil prices could push India's import bill to $911 billion in FY27 from $814 billion in FY26. Foreign exchange reserves, including the forward book, currently provide about 9.2 months of import cover as of March. This is expected to decline to around 7.2 months by March 2027, driven by the Reserve Bank of India's intervention and revaluation losses.

 

The central bank's large forward book is limiting its ability to aggressively intervene in the foreign exchange market. To offset the liquidity impact from dollar sales, the RBI has increasingly relied on other tools, including open market operations. In March alone, the central bank infused about INR 1.8 trillion through government securities purchases.

 

Attracting capital inflows remains a key challenge, the report said. Foreign portfolio investment flows have been particularly weak, with outflows of $11.3 billion in March alone amid risk-off sentiment, taking total outflows in the current financial year to date to $14.3 billion.

 

The current challenge is less about a widening current account deficit and more about persistent capital outflows. Net foreign-currency non-resident inflows have slowed sharply to $2 billion so far in FY26, down from $6.5 billion a year earlier, reflecting weaker external funding conditions.

 

The report said the RBI is effectively navigating the "impossible trinity" by allowing a gradual depreciation of the rupee. This approach helps preserve reserves and maintain accommodative monetary conditions.  End 

 

Reported by Divya Moolayattil

Edited by Saji George Titus

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000 /+91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.