Indian rupee in 2026: Bears may rest a bit, but cautious approach may stay

Indian Rupee

• Experts expect rupee to stabilise in 2026 after sharp fall in 2025
• US–India trade talks and capital flows will be key for rupee's direction
• Rupee may trade in 88-91.50 range; volatility likely amid global uncertainties

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After a bruising 2025 that saw the Indian rupee slide to record lows, currency experts expect 2026 to be a year of stabilisation rather than another leg of sharp depreciation, with the outlook hinging on US–India trade negotiations and the direction of capital flows.

“The 2025 was the year of rupee bears,” said Dilip Parmar, Senior Research Analyst at HDFC Securities.

Parmar noted that persistent capital outflows and geopolitical worries pushed the local currency to a record low, making it the worst-performing currency in the region. “Even after multiple steps taken by the government and the central bank, the rupee surrendered to the US dollar amid a demand-supply imbalance,” Parmar said, adding that higher trade deficits and delays in US–India trade deals were the biggest drags.

For 2026, experts expects USD/INR to consolidate in a broad 88-91.50 range, with markets closely tracking trade talks and capital movements.

The rupee depreciated about 4.75 percent, even as the dollar index recorded one of its sharpest annual declines in years.

According to Abhilash Koikkara, EVP and Head of Forex & Commodities at Nuvama Professional Clients Group, this divergence highlighted the dominance of India-specific pressures over global dollar weakness. Record foreign portfolio investor (FPI) equity outflows of nearly $19 billion, prolonged uncertainty over trade negotiations with the US, and the imposition of steep tariffs weighed heavily on sentiment.

“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.

While the central bank intervened intermittently to curb disorderly moves, 2025 ended as one of the most challenging years for the currency in recent history.

Despite the sharp fall, valuation indicators have turned more supportive. Koikkara pointed out that the rupee’s real effective exchange rate (REER) has slipped to around 97.5, below its long-term average and the weakest since 2018, suggesting modest undervaluation. Indian equity markets have also corrected from previously stretched levels, improving the backdrop for potential inflows.

Looking ahead, Koikkara described the 2026 outlook as “cautiously constructive rather than outright bullish.” With much of the adjustment already behind, a gradual appreciation is possible if progress is made on a US-India trade agreement and portfolio inflows revive after record withdrawals. “Even a partial return of flows could have a meaningful impact,” he said.

Global factors will also play a role. Volatility is expected to remain elevated amid shifting trade dynamics, AI-driven capital reallocation, and policy uncertainty, including US tariff decisions and the appointment of the next Federal Reserve Chair. While the Fed is expected to continue easing toward a neutral stance, divergent paths among major central banks could drive bouts of currency volatility early in the year.

For India, external buffers provide comfort. India’s resilient services exports, steady remittances, and foreign exchange reserves close to $690 billion offer a significant cushion to the currency. Historically, sharp rupee moves driven by capital flow shocks or geopolitical events have been followed by partial reversals, especially when speculative pressure eases or RBI support emerges.

“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.”

With valuations improved but uncertainty still high, the rupee’s path in 2026 is likely to be defined less by outright direction and more by volatility around key policy and flow-driven triggers.