Rupee Outlook 2026: Why the Rupee Might Remain Under Pressure Next Year; this is what experts say – The Times of India

The Indian rupee will face sharp and persistent volatility through 2026 as capital outflows, tariff-related trade disruptions and weak foreign investment flows continue to outweigh the country’s strong macroeconomic fundamentals, analysts and official data said, PTI reported.Despite steady growth and moderate inflation at home, the currency is unlikely to find a sustainable floor until uncertainty over rates subsides. Market participants warn that a trade deal with the US, while helpful, may not be enough on its own to stabilize the rupee.The rupee has weakened almost 5% since crossing the 85 level per dollar in January and has slipped past the all-time low of 91 against the US dollar. Over the year, the currency has depreciated by more than 19% against the euro, around 14% against the British pound and over 5% against the Japanese yen, making it the worst performing among Asian currencies, even as the dollar index fell by more than 10% and global crude oil prices remained weak.The decline accelerated after sweeping reciprocal tariffs announced by U.S. President Donald Trump in April triggered continued outflows from foreign portfolios as global investors shifted capital to other emerging markets that offered better risk-adjusted returns.The pressure is clearly visible in the investment flows. On a net basis, foreign direct investment turned negative between January and October this year, while total investment inflows fell to minus US$0.010 billion in the period, compared to an inflow of US$23 billion in the year-ago period. Net foreign direct investment stood at $6.567 billion, while net portfolio investment remained negative at minus $6.575 billion.“FDI acts as the anchor flow for the balance of payments. When that anchor weakens, the currency becomes more dependent on portfolio flows; forex markets become more sensitive to global risk sentiment; and central bank intervention requirements increase,” Anindya Banerjee, head of currency and commodity research at Kotak Securities, quoted PTI as saying.The fall of the rupee accelerated in the last quarter of the year. The rate fell more than 1% to 89.66 per dollar in one session on November 21, crossed the 90 level on December 2, and crossed the 91 mark on December 16.The government has attributed the depreciation to a widening trade deficit and delays in finalizing a trade pact with the US amid weak capital account support. Minister of State for Finance Pankaj Chaudhary told the Rajya Sabha on December 16 that the fall in the rupee had been influenced by the widening of the trade gap and developments related to the India-US trade deal.RBI Governor Sanjay Malhotra has said the central bank is not targeting a specific exchange rate level, while analysts note that recent rate cuts aimed at supporting domestic growth have reduced the rupee’s relative attractiveness.Dilip Parmar, research analyst at HDFC Securities, described the situation as a capital account-driven crisis, noting that shrinking inflows, and not just trading, are driving the decline. The RBI has also moved to a more flexible exchange rate regime, which the IMF classifies as a ‘crawl-like’ arrangement.The decline in net foreign investment inflows has further increased volatility. “A sharp decline in foreign direct investment has reduced long-term dollar inflows, making the rupee more dependent on volatile portfolio flows,” said Jateen Trivedi, VP research analyst, commodities and currencies, LKP Securities, PTI quoted.“Higher commodity prices and increased risk on US trade deals held back FDI and impacted majority rupees due to lack of intent in inflows and going elsewhere, which are our competitors,” Trivedi added.RBI data also shows a depletion of $10.9 billion in foreign exchange reserves in the July-September FY26 period, compared to an addition of $18.6 billion in the same period a year earlier. The record $17.5 billion exit by foreign institutional investors by 2025 has increased demand for dollars, increasing pressure on the rupee.Analysts expect the current account deficit to widen to around 2% or more in 2026 as the full impact of US punitive tariffs ripples through to exports, increasing structural demand for dollars. “A trade deal with the US would help, but it is not a panacea,” Banerjee said.Despite the short-term stress, analysts say India’s growth trajectory and inflation profile provide a long-term anchor for the currency. Banerjee expects the rupee to test 92-93 levels over the next three to four months amid global volatility, before possibly entering an appreciation phase from April onwards as capital flows realign and dollar weakness becomes more evident, reaching levels of 83-84 by the end of FY27.