Rupee may hit 94-94.5/USD soon, but oil price risks loom
JM Financial predicts near-term Rupee appreciation to 94-94.5/USD due to RBI measures, but warns of oil price volatility and USD 104 levels.
The Indian rupee is poised for a period of near-term appreciation, potentially reaching the 94 to 94.5 per US dollar range, according to a recent report by JM Financial. This projected strengthening comes on the back of aggressive intervention strategies deployed by the Reserve Bank of India (RBI) to stabilize the local currency.
However, the outlook is not without significant caveats. While the currency may find temporary relief, the report warns that sustained high crude oil prices—specifically if they remain at or climb above USD 104 per barrel—could trigger renewed downward pressure on the rupee and other emerging market currencies.
RBI’s Strategic Shield
The central bank has implemented a series of robust measures designed to curb speculation and manage liquidity within the banking system. These actions are expected to provide a cushion for the rupee by:
- Increasing hedging costs: Making it more expensive for market participants to take speculative positions.
- Reducing speculative positioning: Tightening the rules around currency derivatives to limit volatility.
- Absorbing excess liquidity: Using open market operations to manage the amount of rupee circulating in the system.
The report suggests that while the rupee may appreciate to the 94–94.5 level in the short term, the long-term trajectory could see it heading towards the 97–97.5 range if external pressures persist.
The Crude Oil Wildcard
The volatility of global energy markets remains the primary threat to India's currency stability. The JM Financial report highlights that if crude oil prices spike incrementally or remain stagnant at the current levels of USD 104 per barrel for an extended period, the rupee will likely face renewed stress. Such a scenario would impact the capital account, potentially forcing the government to consider fiscal measures to attract foreign institutional investor (FII) inflows.
Tightening the Leash: RBI’s Liquidity Measures
To maintain control over the currency and liquidity, the RBI has introduced several stringent mandates:
- CRR Maintenance: Increasing the minimum daily Cash Reserve Ratio (CRR) maintenance requirement from 90 per cent to 99 per cent of the prescribed CRR, effective from the fortnight beginning October 16, 2026.
- Open Market Sales: The central bank has announced the sale of government securities worth Rs 250 billion to absorb liquidity, following Rs 1 trillion in sales conducted in September.
- Derivative Restrictions: A 20 per cent Foreign Exchange Risk Reserve (FERR) requirement has been set for specific rupee forex derivative contracts exceeding USD 2 million.
- Position Limits: Tightening unhedged rupee derivative position limits from USD 100 million down to just USD 5 million.
- Special Windows: The introduction of a special dollar-supply window specifically for oil marketing companies to manage import costs.
These regulatory shifts have already begun to impact the broader financial landscape. Market participants are increasingly factoring in a steeper rate hike cycle, which has led to a sharp rise in benchmark bond yields, with yields hardening by 9 basis points to 7.39 per cent.