The Indian rupee faces a challenging path in 2026, with its performance heavily dependent on the interplay between domestic balance of payments, global capital flows, and the direction of the US monetary policy. Speaking with CNBC TV18, Patrick Law, Head of Asia Pacific Fixed Income, Currencies and Commodities at Bank of America, noted that after several years of strong performance, India has had a relative 'write-off' kind of year. Its currency depreciated significantly against the US dollar compared to other emerging markets.
Law identified several dominant drivers for the rupee's outlook. He pointed to India's current account situation, which has deteriorated from a small surplus to a small deficit. Compounding this is the uncertainty around capital flows. "Unlike back in 2023, you know, there was a pretty good inflows into India. Last year was pretty much nothing," Law observed. He suggested that equity flows might face challenges as the global market's focus on Artificial Intelligence (AI) does not strongly align with India's current market composition.
A potential trade deal with the US could provide a sentimental boost, shifting the mood from the current, more bearish tone. However, Law cautioned that improved sentiment alone would be insufficient. "We really need to see material capital inflows coming back to India so that the currency can reverse the current depreciation trend," he stated.
The interest rate differential between India and the US remains a crucial factor. The market consensus assumes India's rate-cutting cycle is complete. In the US, however, the outlook is less certain. Law agreed that if the US Federal Reserve were to cut rates aggressively while India holds steady, it would help support the rupee. He noted that the Fed's latest dot plot signals one more rate cut, while the market is pricing in two. He considers a range of one to two cuts to be a "reasonable" expectation. The appointment of a new Fed Chairman remains a significant swing factor that could materially alter this scenario.
Regarding the broader currency market, Law described Asian foreign exchange, including the rupee, as being "held hostage by the overall general direction of the dollar." An aggressive Fed cutting cycle would weaken the dollar and benefit Asian currencies, while a slow pace of cuts would create a struggle for them to appreciate.
On the commodities front, Law anticipates a divergence in trends for 2026. He sees several reasons that could suppress oil prices. In contrast, precious metals like gold and silver have a different story, with demand driven not just by industrial use but also by safe-haven appeal. He suggested that such commodities can continue to rally.
Finally, Law offered a non-consensus view for 2026. While many expect an incoming Fed chair to push for lower interest rates, causing the dollar to weaken, his out-of-consensus call is that the new chair might find it difficult to push for aggressive cuts. "As a result, the dollar actually doesn't go down, if anything, it can go up," he concluded, presenting a scenario that would run contrary to prevailing market expectations.
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