DBS Group Research economist Radhika Rao highlights that surging energy costs and a widening current account deficit are placing significant pressure on the Indian Rupee (INR), driving the USD/INR exchange rate toward new highs. On Monday, USD/INR closed at 93.95-93.98, marking a fresh low for the INR, largely attributed to rising oil prices and evolving global conditions impacting India's external sector dynamics [1]. As India is a net importer of oil and other key energy commodities, the country is facing twin challenges: a broader current account gap and weak capital inflows amid high prices and delayed supplies. These factors are expected to trigger incipient inflationary pressures [1].
Rao notes that volatile portfolio inflows had previously weighed on the currency, but the recent surge in energy prices following Middle East tensions threatens to further widen the current account gap through a larger import bill and slower remittance inflows. This could result in a second consecutive year of balance of payments (BOP) deficit in FY26, which would be a first for India [1]. Despite these stagflationary headwinds, DBS expects the Reserve Bank of India (RBI) to keep interest rates unchanged in 2026, opting instead to defend the currency through active foreign exchange interventions and targeted liquidity measures. The bar for rate hikes remains high due to the exogenous nature of the event risk and stagflationary shock [1].
The banking system liquidity has returned to a modest deficit, influenced by advance tax outflows and strong FX intervention. In response, the RBI infused INR 793 billion via an overnight Variable Rate Repo (VRR) auction yesterday (against a notified INR 1 trillion) and announced plans for a 3-day auction on Tuesday worth INR 1 trillion. More liquidity measures are likely if the defense against rupee weakness continues [1].
CONCLUSION
The Indian Rupee is under significant pressure from rising energy costs and a widening current account deficit, pushing USD/INR to record highs. Despite these challenges, DBS expects the RBI to maintain its current interest rate stance in 2026, focusing instead on FX interventions and liquidity support. Market sentiment remains negative, with high impact expected as stagflation risks persist.