Key pressure point
Axis Bank’s concern is not simply the size of the current-account deficit, but the changing structure of India’s external financing. The report says capital conditions have “also been weakened by FDI”, with UNCTAD data showing flows moving away from middle-income countries and global value-chain-linked projects towards artificial intelligence and other strategic sectors and partners.
Dalal writes that this shift means “the sustainable CAD has likely shrunk”, implying a lower fair value for the rupee. The report also warns that India’s productivity advantage in technology and global capability centres could become vulnerable if artificial intelligence erodes that edge.
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For FY27, Axis Bank expects India’s current-account deficit at 1.4% of GDP, while the balance of payments is projected to show a surplus of around $20 billion. However, the surplus is expected to be “largely boosted by the FCNR and other concessional swap flows”, highlighting underlying external vulnerabilities.
Adding to the pressure
Another major risk comes from the large portfolio of forward short positions. Axis Bank estimates these at around $220 billion by mid-September, up from $136 billion in July.
Dalal says the position will likely create “pressure to accumulate reserves” and “pressures on MIFOR that can push domestic rates higher / lead to further widening of term premium”. This could also affect India’s domestic interest-rate environment.
The report also points to India’s relatively low reserve adequacy under the IMF’s ARA framework, adding to currency vulnerability.
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Devaluation may be the adjustment mechanism
Axis Bank frames the rupee outlook alongside high domestic asset valuations and surplus savings. Dalal writes that the issue “essentially one that calls for devaluation”, with the adjustment potentially falling on the INR, domestic assets or human capital.
The bank considers an INR adjustment the “fairest distribution”, arguing that a fall in asset prices could weaken corporate and bank balance sheets, while a deterioration in human capital would carry longer-term costs.
For now, the conclusion is clear: Axis Bank “continues to see INR at 97 by Dec’26 and 100 by Jun’27”.
