Goldman Sachs sees the rupee approaching a turning point, but warns that trade uncertainty could dictate the next move

Investors who see the rupee weakening past $90 against the dollar have a new indicator to assess: Goldman Sachs believes the worst phase of the currency’s underperformance is largely behind it, even as India’s external balances remain under pressure and rate uncertainty clouds the outlook. The brokerage argued that while flows have deteriorated significantly, India’s underlying external measures still compare favorably to previous stress episodes, providing a more muted interpretation of the rupee’s decline than market sentiment suggests.Goldman Sachs attributed the rupee’s decline, including its breach of the 90s last week and around 5% depreciation since the start of the year, to weakening balance of payments dynamics and “reduced RBI FX intervention” in recent weeks. The BoP fell into deficit in the third quarter as the current account widened due to “lower exports and higher gold imports” along with muted capital flows.

The fourth quarter is unlikely to provide a reprieve. The brokerage highlighted a “record goods trade deficit in October” and continued uncertainty surrounding the US-India trade deal, factors they said point to “a further deterioration in the balance of payments in the fourth quarter.” Foreign investors have already sold $17 billion worth of Indian stocks this year.Still, Goldman emphasized that overall external vulnerability remains “significantly better than in previous crisis periods” due to strong foreign exchange reserves, robust import coverage and a favorable growth differential between India and the world.

The INR has already undergone a meaningful adjustment

The brokerage noted that the currency’s real, trade-weighted adjustment has been substantial. On a REER basis, the INR has weakened by around 8% year-on-year from October, wiping out the effects of two years of heavy interventions that suppressed nominal volatility.

A weaker trade-weighted rupee, Goldman argued, provides a cushion for Indian exporters at a time when US tariffs on certain goods total 50%, while risks to import inflation remain contained given subdued headline inflation.

Basic principle: the shortage will decrease sharply, flows will improve

Goldman expects India’s current account deficit to narrow substantially early next year. The base case forecasts the gap to shrink from around 3% of GDP in the fourth quarter of 2025 to 0.1% in the first quarter of 2026, supported by stronger exports and “seasonally softer gold imports,” assuming the additional 25% US tariffs are negotiated by the end of the year. Capital flows are expected to recover as rate-related uncertainty subsides, improving the balance of payments and stabilizing the rupee. In such a scenario, Goldman expects the Reserve Bank of India to rebuild foreign exchange reserves, keeping the currency within a certain range despite improved fundamental conditions.

However, the brokerage warned that any delay in the US-India trade deal until the first quarter of 2026 would make the BoP weaker than the baseline projection, meaning the rupee “could remain under pressure.”

To reflect the near-term situation and expected reserve replenishment, Goldman has revised its USD/INR forecasts higher to 89.5 in three months and 91 in both six and 12 months.

Market response

The broker’s assessment comes on a morning when the rupee weakened again in the spot market. As of 10:30 am IST, the INR fell almost 0.3% to 90.21 per dollar, pressured by short-term dollar outflows from local companies that offset support from a softer dollar.

Traders pointed to strong demand from foreign and private lenders, likely linked to payments to traders, even as the dollar index fell after the US Federal Reserve cut rates and issued less aggressive than expected guidance.

Asian currencies traded mixed, with analysts noting that the rupee remains on track for its worst annual performance since 2022 after absorbing weak portfolio flows, tighter US trade measures and rising tension in India’s foreign accounts.

Stability depends on Washington and New Delhi

Goldman’s message to investors is clear: while the rupee’s depreciation reflects real external pressures, the underlying macro picture is not as fragile as market moves imply. The currency’s next meaningful direction will depend heavily on the trajectory of US-India tariff negotiations and the timing of any recovery in capital flows.

For now, the rupee is around 90, while the balance of payments is weaker. But whether the rupee stabilizes or faces further pressure will be determined by policy outcomes rather than domestic vulnerabilities alone.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)