Summary of this article
RBI may raise interest rate by 50 bps in current year
Rupee may touch 100-dollar-mark on West Asia tensions
The rupee could weaken to the psychologically important 100-mark against the dollar and the Reserve Bank of India (RBI) may be forced to sharply raise interest rates if tensions in West Asia continue to escalate, brokerage firm MUFG has said in a report. A prolonged conflict around the Strait of Hormuz and a sustained rise in crude oil prices could create significant pressure on India’s economy, inflation, and external balances, the report said.
The rupee settled at 95.03 against the dollar on May 29, 2026, after recovering from a record low of around 97 to a dollar due to persistent intervention from the RBI to curb the fall. The report said the rupee is already vulnerable due to weak capital inflows and a widening current account deficit. Under its baseline scenario, where oil averages around $80 per barrel, MUFG expects the rupee to trade near 96 against the dollar by early 2027. However, if oil prices rise to $100-120 per barrel due to geopolitical tensions, the currency could weaken further to 98-100 levels.
India remains heavily dependent on imported crude oil, making the economy particularly sensitive to disruptions in the Strait of Hormuz, through which a large portion of global oil supplies passes. The report also highlighted risks from a possible weak southwest monsoon and a “Super El-Nino” event that could push food inflation higher.
The brokerage expects the RBI to respond with interest rate hikes to defend the rupee and contain inflationary pressures. It has forecast at least a 50 basis point (bps) hike in repo rate during the current fiscal year, taking the terminal repo rate to 5.75 per cent. The report expects the central bank to begin tightening as early as June 2026. The RBI’s Monetary Policy Committee (MPC) is set to meet from June 4-6, 2026.
In more severe scenarios, MUFG has cautioned that RBI may have to raise the repo rate to as high as 6.75 per cent if oil prices remain elevated and inflation continues to accelerate. “In risk scenarios, we think RBI may bring terminal rates up to between 6.25 per cent and 6.75 per cent, with some reversal in rate hikes subsequently in FY2027/28 once RBI sees year-on-year (y-o-y) inflation moderating more durably,” the report said.
The report added that financial markets are already pricing in significant stress. According to MUFG, India’s overnight indexed swap (OIS) market has priced in more than 125 bps of potential rate hikes over the next year, while the 12-month dollar-rupee forward contracts are already nearing the 100 level.
Apart from oil prices, the report also flagged weak foreign investment flows as a major structural concern for the rupee. India’s net direct investment inflows have sharply declined in recent years as foreign investors increasingly booked profits and sought opportunities in other safer markets.
To stabilise the currency, MUFG expects the government and the regulators to consider additional measures, such as tighter curbs on outward remittances, higher import duties on non-essential goods, and additional hike in fuel prices. Other measures, such as special foreign currency bond issuances aimed at attracting non-resident Indian (NRI) funds could also be on the cards. The report added that while short-term administrative measures may help calm markets temporarily, a durable recovery in the rupee would ultimately depend on stronger long-term capital inflows and improvements in India’s investment environment.
