MUFG Warns of USD/INR Upside if Geopolitical Risks Linger

Key Moments

MUFG Highlights Rupee Exposure to Geopolitical and Energy Shocks

MUFG’s Senior Currency Analyst Michael Wan cautions that the Indian Rupee could face substantial downside if the Iran-Middle East conflict is prolonged and the Strait of Hormuz remains closed. Under such conditions, he sees USD/INR potentially moving above 95, driven by higher Oil prices and associated macro pressures.

Despite these risks, MUFG’s central scenario still assumes a de-escalation in regional tensions. Under that base case, the bank forecasts USD/INR at 92.00 by March 2026 and 93.50 by December 2026, premised on an eventual easing in oil prices back toward levels seen before the Iran-related conflict.

Scenario Analysis: Oil Price Paths and USD/INR Projections

Wan underscores how persistent strength in Brent crude could materially alter the Rupee outlook relative to MUFG’s baseline. At the time of his comments, Brent oil prices were described as having returned to US$100/bbl, a level that, if sustained, could keep the Indian currency under pressure.

Regarding the sensitivity analysis, MUFG notes: “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.”

On the more extreme side, the report states: “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.”

Macro Pressures: Current Account and Capital Flows

MUFG links higher Oil and energy costs directly to Rupee weakness through the balance of payments channel. The report states: “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.”

Beyond the trade and current account dynamics, the bank also points to capital flow trends as an additional headwind for the currency. It notes continued fragility in capital inflows and ongoing FDI repatriation as factors that could magnify Rupee weakness over the forecast horizon.

According to the report: “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.”