Asia FI & FX Strategy Viewpoint: India FX: Oil shock’s ripple effects

Research evidence excerpt

Asia FI & FX Strategy Viewpoint: India FX: Oil shock’s ripple effects

commercial borrowing loans

narrowed substantially, lowering hedging costs and leaving little room for nominal INR EM: Emerging markets

depreciation vs forwards. B) One-way FX depreciation and lack-luster equity returns

increased degree of FX hedging by equity investors and even more so for debt flows. C) FDI: Foreign direct investment

While capital account is not fully convertible yet, desire for INR internationalization has

IGB: Indian government INR bond

led RBI to raise flexibility on capital flows, including exporter repatriation flows. Thus,

policy tightening in current environment would be more effective in supporting INR by a) INR: Indian rupee

widening hedging costs for equity flows and improving carry for debt investors, b)

restoring external macro-stability by calibrating domestic demand, and c) cementing NDOIS: Non-deliverable interest rate swap

RBI’s inflation fighting credibility. NDF: Non deliverable forwards

… or culminating in further cyclical devaluation NEER: Nominal effective exchange rate

While RBI has indeed encouraged wider rate-differentials offshore (NDF), we believe

that RBI’s appetite for domestic rates tightening remains limited due to unwillingness to ODI: Outward direct investment

sacrifice growth to stabilize FX. That raises risk of accommodative policies delaying the OMO: Open market operations

much-needed macro calibration, and adding to currency woes. With chances of oil

staying higher for longer, we revise our forecast for further INR weakness. to 96/USD by RBI: Reserve Bank of India

mid‑2026 and 98/USD by end-2026. We believe that that would also keep NDF FX yields

REER: Real effective exchange rate