The dollar index has been on a steep decline this year, but the Indian rupee has failed to appreciate due to a combination of pressure from domestic and global cues, including Trump's tariffs and persistent FII outflows, currency experts said.
The Dollar Index (DXY) has fallen 7 percent so far in FY26 and 11.3 percent year-to-date, reflecting growing concerns over America’s fiscal trajectory.
Jateen Trivedi, VP and Research Analyst - Commodity and Currency at LKP Securities said the dollar has weakened due to rising talk of de-dollarization across Asia, falling global demand for US bonds amid record US debt and a growing shift by central banks toward gold reserves. Trivedi added that lower US interest rates and a weaker growth outlook too have kept the pressure on the index.
Aditi Gupta, Economist at Bank of Baroda said the sharp reversal was largely led by the unwinding of the 'US exceptionalism' narrative, as labour market data has started to show cracks, and expansionary fiscal policy has added to concerns over rising debt.
Why is Rupee Under Pressure Despite a Softer Dollar?
Usually, a weaker dollar allows the local currency to appreciate due to support from steady inflows and easing import costs, especially commodities. However, this year, the trend has been reversed.
“The rupee has not benefited much because of tariffs imposed by the US on Indian exports, persistent FII outflows, and pressure to reduce low-cost Russian crude imports,” LKP's Jateen Trivedi said.
BoB's Aditi Gupta said the weak FPI inflows into India for much of the year and a shift in RBI’s stance to allow a wider trading range for the rupee have weighed on the range for the currency.
The Indian rupee has depreciated around 3 percent in FY26 so far, but experts believe it is not yet a concern for India amid strong external position underpinned by record forex reserves and ample tools with the Reserve Bank of India to stabilise currency.
Rupee Fall vs Recent Trends
The depreciation of rupee has been the highest after two financial years. According to an analysis by Moneycontrol, the rupee has registered its steepest depreciation since FY23, when it weakened by around 7.78 percent. During FY20, the Indian rupee had depreciated by 8.46 percent against the US dollar. Put in this context, experts strongly feel the current weakness in rupee is notable but less severe than past crises.
Rupee Outlook
Dilip Parmar, Senior Research Analyst at HDFC Securities said this episode marks an exception to the rule, as India’s currency is being driven more by domestic capital outflows and valuation concerns, rather than a broader dollar trend.
Experts also believe that the dollar index bias remains to the downside in the medium term, and unless the US growth surprises strongly or fiscal risks abate, the structural pressures of high debt, falling safe-haven demand and policy divergence may keep the dollar weaker.
“The trajectory for the dollar index appears to be downwards, particularly since the Fed resuming its rate cut cycle. However, we might not see a large drop since a large part of the correction has already happened,” BoB's Gupta said.
Rupee’s fortunes may continue to depend more on domestic flows, trade policy, and central bank stance rather than just the dollar’s path, according to forex experts.
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