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MUFG’s Senior Currency Analyst Michael Wan warns the Indian Rupee is vulnerable under a prolonged Iran–Middle East conflict and Strait of Hormuz closure, with USD/INR potentially rising above 95. The bank’s base case still assumes de-escalation, with USD/INR at 92.00 by March 2026 and 93.50 by December 2026, but higher Oil prices could push the pair towards 95.50–97.50.
Rupee seen weaker on oil and flows
“We see the Indian Rupee as vulnerable and USD/INR likely rising above the 95 levels if the Iran and Middle East conflict is sustained and the Strait of Hormuz remains closed, with Brent oil prices returning back to the US$100/bbl at the time of our writing. While we do not yet know how the Iran and Middle East conflict will play out from here, it’s important to stress our current base case USD/INR forecast of 92.00 by Mar 2026 and 93.50 by Dec 2026 assumes a de-escalation after March 2026 and implicitly for oil prices to fall towards pre-Iran conflict levels over time.”
“As a sensitivity analysis, we think that if oil prices are sustained at US$100/bbl, USD/INR could end the year at 95.50.”
“In a left tail risk scenario if oil sustains at US$120/bbl coupled with meaningful energy shortages, we think USD/INR at 97.50 and even higher will look achievable.”
“Higher oil and energy prices will weigh on INR from FX perspective. We estimate that every US$10/bbl increase in oil prices increases India’s current account deficit by 0.4-0.5% of GDP. As such, if oil prices were to rise towards US$100/bbl, India’s current account deficit will likely move towards the 3% of GDP handle, compared with our baseline forecasts of around 1.5% of GDP.”
“This coupled with still weak capital inflows and continued FDI repatriation suggests that the pressure is likely to increase for INR to weaken through 2026, including for the reasons mentioned above.”
