Daily Voice: Abhishek Banerjee explains why the rupee could return to 85 in 2026

Yes, we must remember that the RBI is only inflation targeting versus the Fed, which has a dual mandate of inflation and growth within price stability. That means, RBI is free to look only at inflation data, and as long as it's below the 4% target, it can take policy decisions.

There were some concerns about attacks on Venezuela, which can increase crude oil prices, but that doesn’t seem to be something that is fully factored in yet. Also, a weaker rupee means we need to import oil at higher prices. In the context of the visit of Putin and the possibility of settling oil trades in INR, the forward risk of oil price hikes in USD seems to have been managed as well.

Do you expect the central bank to maintain the status quo on rates for an extended period?

The central bank has lowered the inflation guidance, and that is being interpreted as room for another cut if inflation does not pick up. Inflation is not a price increase, but a forward expectation of a price increase. That means, even if prices have increased in the short term with the advent of tariffs and supply shortages in the US, unless the future expectation of price increase moves along with it, it doesn’t show up in inflation, which is purely an expectation metric and not a factual metric.

Do you think trade uncertainty is the major reason for the sharp depreciation in the rupee?

It's indeed one of the factors. While the economic impact is limited as the total exports to the US are about $60 billion, of which 60% are textiles, consumer goods, 30% gems and jewellery, and the rest are automotive components, the main downward pressure has been relentless selling by FPIs and FDIs.

Foreign capital that has funded start-ups that are exiting in IPO to public markets is also being taken back by these firms to redeploy or return to investors. This is causing downward pressure as well. However, the main risk is the lack of confidence that any extreme measures towards India can cause capital flows to be controlled, which can lock their capital. Hence, from a sentiment point of view, the US-India trade deal remains a key trigger.

Do you expect 2026 to be a better year for the Indian currency?

Yes, FPI always mean reverts. Hence, given the opening up of bond markets, increased weight of India in MSCI indices, less reliance on imports of oil, lower than expected inflation, better tax collection from fiscal receipts leading to lower current account deficit, and continued exports in areas like IT services and generic pharma, can take rthe upee back to 85 levels.

Also, given ample capex for data centre plays from partnerships like OpenAI and TCS are just the start, such FDI will also lead to rupee hardening. My expectation is not to see the rupee beyond 92 and harden to 85 levels in 12-18 months.

So far, RBI has managed a very soft landing to enable more competitiveness for exporters by letting the rupee decline so that price hikes from tariffs can be better absorbed. If there is a US-India trade deal, the hardening will be quite severe, which can negatively impact IT services the most.

Do you agree with experts who say foreign investors will return to Indian equity markets if the outcome of the trade deal is positive? Do you expect strong double-digit returns in Indian equities in 2026?

Yes, as I said, this will be a key trigger. There are other risks like policy continuity, as the 4th term of PM Modi is not very far away. There is no clear understanding of who will be his successor, or if he will go for a fourth term.

India has Rs 2.5 lakh crore of RBI dividends, Rs 2.5 lakh crore of PSU dividends, Rs 1 lakh crore in the hands of consumers as tax bracket was changed, accelerated government capex to complete their 11.5 lakh crore capex program, GST cut, record competitiveness in rupee as it’s at all time low - all of these make for a very good base. This, coupled with RBI's Rs 1 lakh crore OMO, where they will swap government bonds with cash from the balance sheet of banks, also gives more room for credit growth, especially in infrastructure, where CRR was cut from 4% to 1% few months ago.

Do you believe there is a significant opportunity in manufacturing?

Yes, especially in precision manufacturing versus heavy manufacturing. India is very environmentally conscious as a society, so bringing heavy manufacturing cost efficiency like China would be tough, but India can really outshine in precision manufacturing, engineered products like pre-fabricated parts, and pharma.

Are you bullish on the US markets in 2026?

Yes, I am bullish on only 2 markets going forward, and they are the US and India. On a relative term, the US markets have done a lot better than the Indian markets so far. More so, as dollar-adjusted returns. That only makes Indian markets more and more attractive.

I worked for large sovereign funds - and I know from my experience as a portfolio manager with asset allocators, January-February is when most of the reallocation happens, so this could be a good time to chip in before that.

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