Rupee may need to weaken further as fundamentals shift: Axis Bank | Finance News
The Indian rupee may need to weaken further to align with shifting trade fundamentals and relatively weaker productivity gains from AI, according to an Axis Bank assessment using a model that estimates the fair value of the currency based on external and domestic economic conditions.
Using the Fundamental Equilibrium Exchange Rate (FEER) model, Axis said the rupee appeared close to its fair value in March, but a terms-of-trade shock from surging oil prices triggered by the Iran war and lower AI-led productivity gains compared to other economies could require further adjustment.
“A sustained terms of trade shock and a loss of 5% in relative AI productivity theoretically translate to another 10% weakening of the REER (real effective exchange rate) in a year’s time,” Tanay Dalal, an economist at Axis Bank, said in a rupee outlook note published on Wednesday.
Dalal expects the rupee to depreciate to 97 by year-end and to 100 by June 2027, weaker than levels implied by forward markets. The median forecast of economists polled by Reuters pegged the rupee in the 95.25-96.80 band over the next one year.
The rupee was at 95.90 per dollar on Thursday.
Higher oil prices, slowing capital flows and elevated global bond yields have piled pressure on the rupee this year. The currency has declined 6% year-to-date and is among Asia’s worst performers.
Axis Bank’s research estimates India’s basic balance, which excludes volatile foreign portfolio flows and the impact of central bank interventions in the FX forward market, has been in a $180 billion deficit since mid-2023, despite the current account deficit averaging only 0.6% of GDP in the same timeframe.
The bank estimates that the Reserve Bank of India has sold about $250 billion to support the rupee over that period.
For decades, India maintained a sustainable current account deficit of 2%, but that level may have shrunk to zero in recent years, implying that the rupee can now only endure smaller external imbalances without weakening, Axis Bank added.
