The Indian rupee has been hitting the headlines frequently since the beginning of the year. The domestic currency fell to a new low of 96.96 against the dollar in May this year. It has since recovered and is currently at 94.3,3 down 6 per cent for the year so far.
The US-Iran peace deal, which has pulled oil prices sharply lower, and the Reserve Bank of India’s recent measures to attract foreign money inflows have aided the rupee’s recovery from its all-time low.
It is not only against the dollar that the rupee has weakened. It has also fallen against other major and emerging market currencies. The rupee is down in the range of 3-5 per cent against the euro, yen and British pound. The picture is poorer against emerging market currencies. The rupee has fallen 10 per cent and 14 per cent against the Brazilian real and Russian ruble, respectively. The domestic currency is down 8 per cent against the Chinese yuan.
Will the recent recovery in the rupee against the dollar sustain? What are the factors that favour rupee appreciation, and what are the factors working against it? We analyse different scenarios to see where the rupee may be headed from here. Before getting into the outlook, let us look at what has dragged the rupee lower so far this year.
The driving forces
Two major factors have dragged the rupee lower so far this year. One is crude oil prices, and the other is strong foreign money outflows.
Crude oil
Brent crude oil prices spiked from around $70 per barrel in February to a high of about $119 in March. Fears of supply disruption after the US-Iran war pushed oil prices higher. Oil is India’s major import component and accounts for an average of 25 per cent of the country’s total imports.
The surge in oil prices increased India’s import bill by 23 per cent, from $59.59 billion in March to $73.41 billion in May. This, in turn, widened the merchandise trade deficit from $20.67 billion in March to $28.21 billion in May, a sharp increase of 36 per cent.
The chart alongside clearly shows that the USD/INR pair and crude oil prices have moved in tandem so far this year.
Outflows
Foreign portfolio investors have been on a selling spree, especially in the equity segment, since last year. They pulled out $18.91 billion last year. This was the highest full-calendar year outflow, as per data available since 2005.
This year may turn out to be worse. Data show that there has been a net outflow of a whopping $28.6 billion so far.
What next?
Oil price outlook
Brent crude oil, currently at $80.55 per barrel, has fallen sharply below $100 over the past one month. This has helped the rupee recover strongly from its all-time low. The fall in oil prices is likely to provide some relief on the import bill in the coming months. But how far can it have a positive impact on the rupee? That will depend on how much further oil prices can fall.
On the charts, there is strong support around $75 and $70. Considering the recent sharp fall, it may be difficult for prices to decline below this level. So, there is a good chance that prices could bounce back from around $70 and move towards $85 or even $90. In that case, oil prices may stay in the range of $70-90 over the next few months. Unless geopolitical tensions worsen again, oil prices are unlikely to move above $100 again.
Data from the Petroleum Planning & Analysis Cell show that India’s average crude basket price for FY26 was $71 per barrel. The crude basket is the price at which Indian refiners import crude. The basket price now stands at $103.9 per barrel for this fiscal year so far. For this to fall to $70 or lower, oil prices will have to decline and sustain below $60. That looks less likely.
So, this is unlikely to provide major relief on the import bill compared with last year. The trade deficit may not narrow much even if oil prices stay below $100. Hence, the relief that the rupee has received from the fall in oil prices may be limited, going forward.
Temporary fix
The Reserve Bank of India recently announced a swap window for Foreign Currency Non-Resident Bank deposits, or FCNR(B) deposits. This measure is aimed at attracting foreign capital into the country and, in turn, helping the rupee recover. A similar measure was announced in 2013. That move saw deposits increase by $24.5 billion during the three-month period from September to November 2013, when the swap window was in effect. The rupee appreciated from around 69 to 62 against the dollar during this period.
The FCNR(B) swap window this time is open from June 8 to September 30. According to reports, it is likely to attract about $50 billion. This can provide some relief for the rupee.
However, the circumstances are different this time compared with 2013. Short-end yields in the US were lower then, with the two-year US Treasury yield at around 0.4 per cent. The Fed funds rate was also near the bottom at around 0.25 per cent, and there were no signs of any rate hikes in the US at that time.
Now, the US two-year yield is around 4.2 per cent. The Fed funds rate range is at 3.5-3.75 per cent. A possible rate hike is on the cards by the end of this year, as per the latest projection given after the Fed meeting this week.
So, the RBI’s move may be a temporary fix rather than a permanent solution to retain rupee strength.
Strong dollar
The dollar index, currently at 100.85, has seen a strong rise above 100 after the Fed meeting outcome on Wednesday. As seen from the charts, the index has formed a strong base in the 98-96 region. Immediate resistance is around 101. A strong break above this level will boost the bullish momentum. Such a break will open the door for a fresh rally to 106 by the end of this year or in the first quarter of next year.
Even if the index fails to breach 101 immediately, any pullback can find support in the 99.50-99 region. The rise to 106 mentioned above will be negated or delayed only if the dollar index declines below 99.
High yields
The US two-year Treasury yield, currently at 4.2 per cent, has an important resistance at 4.25 per cent. At the same time, strong support is now at 4 per cent. So, even if the yield fails to rise past 4.25 per cent immediately, it is unlikely to fall below 4 per cent.
Rate hike prospects from the Fed can keep the chances high for the two-year yield to breach 4.25 per cent and rise to 4.5 per cent. Once this rise happens, 4.25 per cent will then become a strong support. From a long-term perspective, there is potential for the two-year yield to rise to 5 per cent over the next one year.
The dollar index and the US two-year Treasury yield have a strong positive correlation, as seen in the chart. So, the initial rise to 4.5 per cent in the two-year yield can translate into a rise to 106 in the dollar index going forward.
Takeaway
Crude oil prices below $100 and the RBI’s FCNR(B) swap window are likely to provide some relief for the rupee. But this may be only for the short term. The rupee can gain some ground and move to 93 or 92.50, in a best-case scenario, in the next quarter.
But once the strong dollar and high US yields take centre stage, the rupee can begin to lose ground again. We can expect the rupee to weaken back towards 96-97 and even make fresh lows as we head into 2027.
Technical analysis
On the charts, the short-term picture looks positive for the Indian rupee, currently at 94.33. The recent price action indicates a lack of strong sellers to drag the domestic currency below 96 again.
Immediate resistance for the rupee is at 94. A break above it can take the rupee higher towards 93.30-93 in the coming months. A break above 93 may not be easy. But if it happens, an extended rise to 92.60-92.50 is possible.
We can expect the rupee to reverse lower either from around 93 or from the 92.60-92.50 region. This leg of decline will have the potential to drag the rupee lower again to 95-96.
If the rupee fails to breach 94 immediately, then a range of 94-96 is possible for a month or two. Thereafter, the rise to 93 can happen.
Broadly, we can expect a range of 94-96 in the short term and 93/92.50-96 in the medium term.
Within this range, the preferred path is for the rupee to strengthen towards 93-92.50 first, before weakening again towards 96.
Published on June 20, 2026
