Rupee depreciates 3.2% in FY26 but not a concern yet amid high forex reserves, say experts

Indian rupee

Indian rupee, which has been under severe pressure amid external shocks from start of this financial year, has depreciated around 3.2 percent in FY26 so far. However, experts believe that it is not yet a concern for India amid strong external position underpinned by record-high forex reserves and ample tool available with the Reserve Bank of India to stabilise currency.

The current depreciation of the local currency is the highest after two financial years. According to an analysis by Moneycontrol, rupee has registered its steepest depreciation since FY23, when the home currency depreciated around 7.78 percent. In FY20, it had depreciated 8.46 percent.

Seen against these instances, experts strongly feel that the current weakness in rupee is notable but less severe than past crises.

“The Indian rupee has weakened by 3.38 percent so far in this fiscal year, making it the steepest decline after the previous two financial years. While this is certainly noticeable, it is not yet cause for alarm. India’s external position remains fairly strong, underpinned by record-high forex reserves. Unlike past episodes of sharp depreciation, the Reserve Bank of India (RBI) today has ample tools to stabilize the currency if needed,” said Amit Pabari, managing director at CR Forex Advisors.

Even as the domestic currency has been depreciating since late last calendar year, most depreciation and record low levels were being touched since the start of this fiscal. The first stress came in the form of US tariffs uncertainties, followed by other geopolitical situations such as a prolonged Russia–Ukraine war and rising tensions between Israel and Iran. Domestic factors such as the RBI’s strategy on unwinding portion of short forward currency positions, and foreign investors outflows from domestic equity market have also contributed to the depreciation of Rupee.

According to the Bloomberg data, rupee depreciated to 88.2787 against the greenback on September 12, from 85.5137 on April 2, 2025, registering a fall of 2.77.

US tariffs haunt

The imposition of 50 percent tariffs by US on Indian goods, which took effect on August 27, has dampened dollar inflows and negatively impacted domestic market sentiment, reducing export competitiveness and revenue. The tariffs are among the highest in the world, including a 25 percent penalty for buying crude oil from Russia.

The sectors that are impacted due to high import duties include textiles/clothing, gems and jewellery, shrimp, leather and footwear, animal products, chemicals and electrical and mechanical machinery.

Sectors such as pharma, energy products and electronic goods are out of the ambit of these sweeping duties. The US accounted for about 20 percent of India's $437.42 billion worth of goods exports in 2024-25.

The US has been the largest trading partner of India since 2021-22. In 2024-25, the bilateral trade in goods stood at $131.8 billion ($86.5 billion exports and $45.3 billion imports).

Persistent outflows & RBI’s strategy

Additionally, the tariffs have also led to outflows of funds by the foreign investors from the Indian equities. Persistent withdrawals from Indian equities and debt markets, totaling $11.7 billion so far in FY26, reflect declining global risk appetite and have amplified depreciation pressures.

Pabari from CR Forex Advisors said the RBI has actively unwound portions of its short forward currency positions, which has limited any upward momentum for the rupee and made it more vulnerable to external shocks.

Previous sharp depreciation

In FY20, the rupee had depreciated around 8.46 percent due to the sudden onset of the Covid-19 pandemic. Global trade froze, and massive capital flight from emerging markets, including India, pushed the currency lower. While coordinated global monetary easing and RBI liquidity support helped limit the decline, this episode highlighted how quickly a health crisis could translate into a currency shock, experts said.

Similarly, in FY23 rupee depreciated 7.78 percent due to the combined impact of Russia’s invasion of Ukraine and rising global inflation. Soaring energy and commodity prices increased India’s import bill, while aggressive US Federal Reserve rate hikes drew capital into dollar assets. These factors pushed the rupee past 83 against the US dollar, creating one of the most prolonged periods of currency weakness in recent memory, experts added.

Outlook

Currency experts believe that if the current tariff uncertainty continues, the Indian rupee could weaken further, potentially trading in the 88.80–89.00 range against the US dollar in the near term.

To support currency or to keep it stable, the central bank may intervene in the market, but will not target any levels for the currency, experts added.