Axis Bank warns Indian rupee may need further depreciation amid oil shock and AI lag

Axis Bank applied its FEER model to assess the Indian rupee's fair value, concluding it is close to equilibrium as of March but faces downside risks. A sustained shock to the terms of trade, driven by surging oil prices after the Iran war, together with a five-percent relative lag in AI-related productivity, could force the real effective exchange rate to weaken by about 10 percent over the next twelve months. Economist Tanay Dalal expects the rupee to slide to roughly 97 per dollar by the end of the year and to 100 per dollar by June 2027, levels lower than those implied by market forwards.

The currency has already dropped six percent this year, making it one of Asia's poorest performers, while higher global bond yields and slower capital inflows add pressure. Axis also notes that India's basic balance has been in a $180 billion deficit since mid-2023, despite a modest current-account gap, and the RBI has intervened with about $250 billion of support.