The not possible trinity of greenback weak point, subdued crude oil worth & INR depreciation, ETCFO
In 2025, each greenback and oil costs have slipped to ranges final seen greater than three-years in the past, which ought to have resulted in INR energy. Nonetheless, USDINR has remained range-bound and even registered a gentle depreciation over the past one yr. The INR consequence displays two elements: muted capital flows and RBI intervention.
The steadiness of funds—comprising the present account and capital account—is monitoring a US$0.8 billion surplus in Q1FY26, in comparison with US$5.2 billion inflows in Q1FY25. This displays subdued capital inflows, with internet FPI inflows at simply US$0.4 billion in Q1FY26.
Muted capital inflows usually are not distinctive to India and are seen throughout the EM area, the place FPI inflows are down almost 50% within the first 5 months of 2025. A key attribute of 2025 is that greenback weak point has been triggered by risk-off sentiment. In earlier cycles, such sentiment sometimes benefitted the greenback, seen as a protected haven.
Nonetheless, there was a elementary shift in market notion of the US economic system—pushed not simply by erratic commerce insurance policies, but in addition by rising issues over the sustainability of US authorities debt. In consequence, capital flows have been reallocated away from the US to different developed markets just like the Euro Space and Japan, as traders search various protected havens.
One other issue capping capital inflows into EMs is the Fed’s cautious method towards coverage easing. After climbing charges by 525 bps post-Covid resulting from inflation pressures, the Fed has lower charges by solely 100 bps since H2 2024. It has additionally continued shrinking its steadiness sheet, albeit at a average tempo. Therefore, EM capital inflows are anticipated to stay muted, with the Fed’s rate-cutting cycle prone to keep shallow.
For the total yr, India’s steadiness of funds surplus is projected to rise to US$14 billion in FY26 versus a US$5 billion deficit in FY25, reflecting an enchancment in FDI and ECB inflows. The lack of US exceptionalism ought to scale back repatriation pressures, supporting stronger internet FDI inflows.
Expectations of additional Fed fee cuts and decrease ahead premiums have boosted ECB inflows. On the present account aspect, the deficit is anticipated to widen barely to 1.1% of GDP in FY26 from 0.6% in FY25, resulting from weaker merchandise export development stemming from international commerce uncertainty pushed by bilateral tariffs.
RBI’s intervention technique has shifted over the previous yr, with FX market intervention lowered. In consequence, two-way volatility in USDINR has elevated in 2025. This shift displays two developments: (1) a stronger financial coverage deal with home development, and (2) a build-up of internet greenback shorts within the RBI’s ahead ebook.
For the reason that starting of 2025, the RBI has supported development utilizing a mixture of coverage fee cuts and vital sturdy liquidity infusion. Restricted FX intervention goals to keep away from draining home or interbank liquidity throughout INR depreciation spells. The financial coverage precedence is to take care of ample liquidity surplus to make sure efficient fee transmission.
RBI’s ahead ebook exhibits a internet greenback quick place—by way of buy-sell swaps—most of which mature inside a yr. This place, in-built 2024 to restrict FX reserve and liquidity affect from spot interventions, has been step by step lowered—from US$88.8 billion in February 2025 to US$65.2 billion by Might 2025. The discount has largely been led by the maturity of short-end swaps. RBI can also be shopping for {dollars} within the spot market to neutralize the liquidity and reserve affect.
Given the subdued capital inflows and still-large adverse ahead ebook, the RBI is anticipated to proceed absorbing inflows when alternatives come up.
Regardless of expectations of extended greenback weak point resulting from US fiscal issues and softening development, the INR is prone to face delicate depreciation pressures. Nonetheless, fundamentals stay supportive—India’s exterior debt-to-GDP ratio is low, publicity to tariff tensions is restricted, and FX reserves are sufficient.
General, average depreciation is anticipated, pushed by muted capital flows and prevailing risk-off sentiment. The USDINR is projected to rise to 86.50–87.00 by March 2026.
(The creator Gaura Sen Gupta is Chief Economist at IDFC FIRST Financial institution. Views are personal)
(Disclaimer: Suggestions, strategies, views, and opinions given by specialists are their very own. These don’t characterize the views of the Financial Occasions)
