The rupee could steadily appreciate to 92.5 against the dollar by the end of 2027, according to Robert Subbaraman, Head of Global Macro Research at Nomura, supported by India’s strong growth, prudent policies, rising interest rates and the potential benefit of sustained lower oil prices.
“We’re forecasting 94 for dollar-INR by the end of this year, and we’re not too far away from that. Our forecast for the end of 2027 is 92.5. So, we do feel the currency is going to steadily appreciate, though not very sharply,” he said.
Subbaraman expects India to remain in a “sweet spot” following the US midterm election outcome, with lower oil prices and a slowdown in the AI trade creating a favourable backdrop for Indian markets.
He expects gross domestic product (GDP) growth to settle around 7%, while inflation could rise above 6% before peaking and easing in the second quarter of next year.
This is an edited transcript of the interview.
Question
What do you think is the read-through for emerging markets and specifically for markets like India?
Answer:
The US midterm outcome was a surprise even for those who thought there would be a clean sweep of the Democrats. I don’t think many thought it would be such an extreme clean sweep. So, bottomline for emerging markets, particularly lower-income emerging markets in Southeast Asia and India, this is a fantastic outcome. The midterms have been great news for India. It is like a sweet spot for India. On the one hand, the market view, and rightly so, is that the chances of another full-blown war between the US and Iran have diminished, and we’ve seen a big drop in oil prices. That’s clearly good for India because India imports a lot of oil. It should improve the balance of payments and also help lower inflation. On the other hand, the Democrats doing so well, and particularly taking over some of the states that are very big builders of data centers, such as Texas and a few others, is very significant. The new leaders of these states are saying they don’t want so many data centers. They want to impose moratoriums on starting construction on new data centers. This is very significant because Texas alone accounts for about 30% of all the data centers under construction in the US. You add on the other ones that the Democrats have taken over now, and you’re getting close to about half of the data centers. Less data center construction means there’s going to be less memory power for powering artificial intelligence (AI). You’re seeing particularly upstream AI plays, like Korea and Taiwan, down today. The NASDAQ futures market is down again. This is also good news for India because India is regarded as a hedge against AI, and AI has gone a little bit out of fashion now.
Question
A word more on US yields. We’ve seen this dramatic fall already from 5.36 towards 5%, and now towards 4.85. What’s your sense about the US yield range and the pressure? Is it that there will be less borrowing by the private sector?
Answer:
I would say a few things. I think part of the reason for the decline in US yields in the last couple of weeks has been some souring of the AI trade and some rotation back into fixed income. More recently, though, the other argument that’s starting to be played is that under a gridlocked Congress, and with anticipation that perhaps the Democrats are going to do very well in 2028, the scope for more fiscal expansion is limited. We could, in fact, see fiscal consolidation under a more united Democrat government in the future. I think that is also putting some downward pressure on US long-term rates. But overall, we’re not expecting US rates to go substantially lower from here. We still feel we are in an environment of higher for longer. Even at these 10-year yields of over 4.8%, they’re still reasonably high, and we think that’s going to be the case. We’re not expecting, for instance, the Fed to cut rates anytime soon. In fact, we think the Fed will probably hike again next month in December.
Question
How many rate hikes would you pencil in?
Answer:
We, at this stage, only have one more hike in December and then a very long hold. I would say the risk is there could be perhaps one or two more. That’s the direction we would think the risk is in, and there could be more hikes rather than no hikes. I think one interesting thing for the Fed is that with the Democrats now holding power in the Senate, it’s going to be much harder for President Trump and the White House to get new Federal Open Market Committee (FOMC) nominations through the Senate. Jerome Powell, the previous Fed chair, is still on the FOMC. He may step down soon, but the chance of the Trump administration getting a new dovish FOMC member through the Senate has diminished a lot. So, in the medium term, that also plays to the view that the FOMC overall is going to remain very focused on inflation and monetary policy and less politically influenced than before.
Question
Coming to the impact on India, first on the currency. What’s your sense? Does it even get to 93 next year? Are we seeing further appreciation of the currency?
Answer:
I think so. Sonal Varma, our India chief economist, is right. We’re forecasting 94 for dollar-rupee by the end of this year, and we’re not too far away from that. Our forecast for the end of 2027 is 92.5. So, we do feel the currency is going to steadily appreciate, though not very sharply. I’ve talked before on this show about India’s fundamentals. In terms of an emerging market, it’s got one of the highest growth rates in the world. You can add on the developed economies as well. We think it’ll be around 7% growth, and we think overall fiscal and monetary policy are pretty prudent. Interest rates are starting to go up a little bit in India and will probably go up a bit further, in our view. All these things are supportive of the currency, and now we have a tailwind, if it’s sustained, of lower oil prices as well.
Question
Broadly, is there an upside risk to your growth forecast because the tariff threat and the crude threat are lower, and is there a downside risk to your inflation forecast for India?
Answer:
No, I would say right now we are fairly balanced with our forecasts. We think gross domestic product (GDP) growth is going to slow and settle at around 7%, which is solid growth. We are cognizant that prices are rising in India, and there’s a lag before that starts to affect the cost of living and consumer spending. I’m not just talking about energy; I’m talking about food prices as well. Interest rates are going up, and that generally has a constraining effect as well. On the inflation side, there are lags, and what’s going to happen to inflation in the next three to six months is pretty much baked in. Our view is that the latest reading was 5.5%. We think inflation is going to go higher, probably to a bit over 6% late this year or early next year. But that’s probably the peak, and then we’ll start to see it easing off again. It’s hard to be too definitive, especially on inflation right now, because we still don’t know what’s going to happen with the US and Iran. A lot of that is still an important point. Trump still has executive power to decide whether to attack or not. We’ll have to see. But as things are looking right now, inflation is not going to take off to 7%, 8% or 9%. It could go a bit higher, but then it’s going to start to crest and hopefully ease off as we get into the second quarter of next year.
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India in a ‘sweet spot’ as lower oil prices boost outlook: Nomura’s Robert Subbaraman
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