Rupee to hit 99, fiscal deficit at 5%: Rahul Bajoria sees deeper pain ahead for India

India's macroeconomic environment is under sustained stress, and three months into the Middle East conflict, the pain is looking increasingly structural. Rahul Bajoria, Head of India and ASEAN Economic Research at BofA Securities, says the country is now navigating what he calls an "embedded inflation cycle," one driven by a terms-of-trade shock that is squeezing both prices and external financing simultaneously.

"Even if the war ends tomorrow, you will still see some amount of adjustments have to be made as far as fuel prices are concerned in order to restabilise the macroeconomic environment," says Bajoria.

India's FY27 deficit at 5% of GDP

On the fiscal front, Bajoria projects India's FY27 deficit at 5% of GDP, significantly wider than the government's own target of 4.3%. The gap is being driven by three forces: a surge in fertiliser subsidies (with international prices more than doubling), the revenue hit from April's ₹10-per-litre excise duty cut on fuel, and softening tax collections as consumer demand cools. Combined, these pressures could theoretically push the deficit 150 basis points higher than budgeted, with Bajoria estimating the government will absorb roughly half of that.


The rupee tells a similar story. BofA's base case sees the currency weakening to ₹98 by end-2026 and ₹99 in 12 months, with Bajoria noting that structural headwinds, including a third consecutive year of negative balance of payments, leave the path of least resistance firmly to the downside. While measures such as removing the 20% tax on FPI bond investments are seen as positive, he cautions they are not a "silver bullet" and that the exchange rate is "prone to overshooting."

India needs another ₹5–7 per litre hike beyond the ₹6–7 already implemented

On fuel prices, BofA estimates India needs a further ₹5–7 per litre hike beyond the ₹6–7 already implemented, with current pricing benchmarked at $85–90 per barrel when it should ideally reflect $95–100. The RBI's record ₹2.87 lakh crore dividend to the government, while useful at the margin, is not seen as sufficient to offset the widening revenue gaps.

Bajoria's key message: most of these problems resolve faster once the war ends, but the structural weaknesses in India's capital account mean the economy cannot simply wait for geopolitics to turn.

Key takeaways

• Rupee seen at ₹98–99 in 12 months; further weakness possible if commodity prices stay elevated
• Fiscal deficit likely to land at 5% in FY27, 70 bps above government's target
• Additional fuel price hikes of ₹5–7/litre may still be needed to restore macro balance
• Gold import duty hike and austerity measures seen as helpful but not decisive on their own
• FPI bond tax removal a positive step, but multiple measures needed to stabilise capital flows
• RBI's ₹2.87 lakh crore dividend provides cushion, but doesn't change the fiscal trajectory