In a report earlier this month, it predicted further weakness for the Indian rupee. It expects the Indian rupee to appreciate modestly above the 90 level in 2026, with a target of 90.80 by the September 2026 quarter. “We had already expected the INR to weaken and underperform, although we note that pressure on currency outflows was more acute than we had expected so far. Our forecasts also imply continued INR weakness against major currency crosses such as the EUR (Euro), JPY (Japanese Yen) and CNY (Chinese Yuan),” the report said.
It is also said that higher import needs and soft net foreign direct investment could weigh on the Indian rupee. The Indian rupee crossed the 90 mark against the USD in early December, extending the now sessional depreciation and setting a new low for the Indian currency.
“Our currency forecasts reflect our expectation of a widening current account deficit of 1.5 percent of GDP and soft net foreign direct investment. These should offset any improvement in portfolio inflows with our expectation of an eventual US-India trade deal, assuming rates will be cut from 50 percent to 25 percent in early 2026,” the MUFG report said.
Against this backdrop, MUFG expects the RBI to intervene to actively limit the depreciation of the rupee. At the same time, the MUFG believes that the fundamentals ultimately imply some pressure on the rupee to weaken and as such on the RBI to allow the rupee to eventually break above 90.
However, the risks are leaning towards more rupee weakness. “Our forecasts are certainly sensitive to rate assumptions. If a US-India trade deal is not reached to reduce rates, the trend would shift towards further INR weakness and more RBI rate cuts, even as India’s domestic economy should continue to soften India’s overall GDP,” the report said.
“It is important to emphasize that we are not overly bearish on the INR (rupee) at current levels given cheaper currency valuations, coupled with stronger momentum for structural reforms that could eventually lift binding constraints on growth. We have already seen the Indian government accelerate reforms such as the simplification of the GST and the consolidation of labor laws, policy steps that would likely not have been possible without the external shock of the 50 percent tariffs. By strengthening the currency, Combined with the recent state election victories by the incumbent government, we believe currency volume can remain reasonably contained, unlike previous cycles.”
MUFG raised India’s GDP forecasts to 7.6 percent for 2025-26 and 7.1 percent for 2026-27, thanks to stronger domestic demand due to tax cuts, better rural activity and the passage of a trade deal with the US in early 2026.
“From a growth perspective, the direct impact of the tariffs on Indian exports has been small to date, with some diversion of exports to markets such as the EU, China and the UAE. This is not to say that the tariffs will not bite, and we believe that the longer tariffs remain at high levels, the more prominent the negative impact will be. As a working assumption, we see tariffs being reduced to 25 percent in early 2026, down from the current 50 percent, but higher than the current 50 percent. While India’s exports of goods and services could decline, we believe the negative impact should be covered by an expected trade deal,” the report said.
The lagged effect of looser monetary policy should also provide some support to domestic demand in 2026, the MUFG report said.
Published on December 27, 2025
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