Axis Bank Research projects a significant depreciation of the Indian Rupee (INR) against the US dollar, potentially reaching ₹100 by June 2027. The bank's September 8 Macro and Markets Flash, authored by Tanay Dalal, anticipates the rupee to trade at ₹97 per dollar by December 2026 before further weakening.
This outlook stems from several critical factors, including a notable shift in global capital flows, a shrinking sustainable current-account deficit, and substantial forward short positions in the market.
Weakening Capital Inflows and FDI Shifts
A primary concern highlighted by Axis Bank is the changing structure of India’s external financing. Global foreign direct investment (FDI) is increasingly moving away from middle-income countries and projects linked to global value chains. Instead, these flows are now predominantly directed towards strategic sectors such as artificial intelligence and other high-tech areas, as evidenced by UNCTAD data.
This reorientation of capital means that the sustainable current-account deficit (CAD) for India has likely diminished, implying a lower fair value for the rupee. Furthermore, India's existing productivity advantages in technology and global capability centers could face challenges if advancements in artificial intelligence begin to erode this competitive edge.
Current Account and Balance of Payments Outlook
For the fiscal year 2027, Axis Bank forecasts India’s current-account deficit to be around 1.4% of GDP. While the balance of payments is expected to show a surplus of approximately $20 billion, this surplus is largely anticipated to be boosted by FCNR (Foreign Currency Non-Resident) and other concessional swap flows. This reliance on temporary or managed inflows underscores underlying external vulnerabilities rather than robust organic capital attraction.
Pressure from Forward Short Positions
Another significant risk factor identified by the bank is the substantial portfolio of forward short positions, estimated at around $220 billion by mid-September—a sharp increase from $136 billion in July. These positions are expected to create upward pressure on domestic interest rates, particularly the MIFOR (Mumbai Interbank Forward Offer Rate), and necessitate increased reserve accumulation by the central bank.
The report also points to India's relatively low reserve adequacy when assessed under the International Monetary Fund's (IMF) ARA (Assessing Reserve Adequacy) framework, which further contributes to the currency's vulnerability.
Devaluation as an Adjustment Mechanism
Axis Bank frames the rupee's prospective devaluation within the context of high domestic asset valuations and surplus savings. Tanay Dalal suggests that a currency adjustment, or devaluation, might be the "fairest distribution" of economic pressures. The alternative adjustments—a fall in domestic asset prices or a deterioration in human capital—are considered less desirable. A decline in asset prices could weaken corporate and bank balance sheets, while a degradation of human capital would incur significant long-term costs for the economy.
In conclusion, Axis Bank reiterates its forecast, projecting the Indian Rupee to reach ₹97 per US dollar by December 2026 and ₹100 by June 2027, driven by these persistent macroeconomic pressures and structural shifts.