Rupee enters 2026 after one of its toughest years in recent memory
After a bruising 2025 that pushed the Indian rupee to record lows, currency markets are entering 2026 with lower bearish intensity but sustained caution. Market participants broadly expect the rupee to stabilise rather than continue its sharp depreciation, even as uncertainty around trade negotiations, capital flows and global monetary policy remains elevated.
“The 2025 was the year of rupee bears,” said Dilip Parmar, Senior Research Analyst at HDFC Securities, summing up a year marked by persistent pressure on the domestic currency. According to Parmar, capital outflows, geopolitical risks and a widening trade deficit overwhelmed policy efforts, pushing the rupee to its weakest-ever levels.
Despite multiple measures taken by the government and the Reserve Bank of India (RBI), the rupee struggled against the US dollar through most of the year. For 2026, however, experts expect consolidation rather than collapse, with USD/INR likely to trade in a broad 88–91.50 range, barring extreme shocks.
Why the rupee struggled in 2025 despite a weaker dollar
One of the most striking aspects of 2025 was the rupee’s underperformance even as the US dollar index saw one of its sharpest annual declines in years. The rupee depreciated around 4.75 percent, making it the worst-performing currency in the region.
According to Abhilash Koikkara, EVP and Head of Forex & Commodities at Nuvama Professional Clients Group, this divergence highlighted the dominance of India-specific headwinds.
Key pressures included:
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Record foreign portfolio investor (FPI) equity outflows of nearly $19 billion
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Prolonged uncertainty around US–India trade negotiations
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The imposition of steep global tariffs
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Rising trade deficit and demand-supply imbalance in the currency market
“After defending key levels for over a month, the RBI stepped back, allowing the rupee to become more market-driven, which eventually led to a breach of the 91-per-dollar level for the first time,” Koikkara said.
Although the central bank intervened intermittently to smooth volatility, 2025 ended as one of the most challenging years for the currency in recent history.
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Valuations turn supportive as rupee enters 2026
While the headline weakness was sharp, valuation indicators now suggest that much of the adjustment may already be behind us.
Koikkara noted that the rupee’s real effective exchange rate (REER) has slipped to around 97.5, below its long-term average and the weakest level since 2018. This points to modest undervaluation, reducing downside risks compared with early 2025.
At the same time, Indian equity markets have corrected from previously stretched valuations, improving the relative appeal of domestic assets. These factors together create a more supportive backdrop for selective capital inflows in 2026.
“In valuation terms, the rupee is no longer expensive,” Koikkara said. “That reduces the intensity of bearish pressure.”
What could drive rupee movement in 2026
Currency strategists describe the outlook for 2026 as “cautiously constructive rather than outright bullish.” Several triggers will determine whether the rupee stabilises closer to the stronger end of the projected range or remains volatile.
Key factors to watch include:
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Progress on a US–India trade agreement
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Revival of portfolio inflows after record withdrawals
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Direction of US interest rates and Federal Reserve policy
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RBI’s tolerance for currency volatility
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Global risk sentiment amid geopolitical and trade tensions
“Even a partial return of flows could have a meaningful impact,” Koikkara said, highlighting how sensitive USD/INR remains to capital movements.
Global uncertainties still pose volatility risks
Despite expectations of stabilisation, volatility is unlikely to disappear. Global markets remain exposed to shifting trade dynamics, AI-driven capital reallocation, and policy uncertainty in major economies.
US tariff decisions, geopolitical developments and the appointment of the next Federal Reserve Chair are expected to drive sharp but intermittent currency moves. While the Fed is projected to continue easing toward a neutral stance, divergent paths among global central banks could trigger bouts of volatility, especially in the first half of the year.
This suggests that while sharp depreciation may be less likely, range-bound swings could remain a defining feature of rupee trading in 2026.
India’s external buffers provide resilience
On the domestic front, India enters 2026 with several structural buffers that limit extreme downside risks.
These include:
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Resilient services exports
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Steady remittance inflows
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Foreign exchange reserves close to $690 billion
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A largely manageable external debt profile
Historically, sharp rupee moves driven by capital flow shocks or geopolitical events have often been followed by partial reversals, particularly when speculative pressure eases or RBI support emerges.
“These buffers don’t eliminate volatility, but they significantly reduce the risk of disorderly depreciation,” a forex strategist noted.
Stabilisation, not strength, likely to define 2026
In summary, experts believe 2026 is unlikely to repeat the extreme weakness of 2025. Instead, the rupee appears set for a phase of stabilisation, with movements increasingly driven by policy clarity and capital flows rather than panic-driven selling.
“In sum, 2025 left the rupee weaker but more competitively valued,” Koikkara said. “That sets the stage for stabilisation in 2026, provided policy clarity improves and capital flows begin to normalise.”
For investors and businesses, the rupee’s journey in 2026 is expected to be less about direction and more about managing volatility, with caution remaining the dominant theme despite improved valuations.
