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Rupee Faces Continued Pressure, UBS Forecasts USD/INR at 94
UBS Global Research anticipates the Indian rupee will face sustained headwinds, projecting the dollar-rupee exchange rate at 94 over the next twelve months. Rohit Arora, Head of Asia FX and Rates Strategy at UBS, cited diminishing capital inflows, a widening current account deficit, and an anticipated recovery in the US dollar as primary concerns.
Market Dynamics
The rupee has recently lagged regional currencies, a trend attributed by Arora to sluggish domestic demand, concerns over trade tariffs, and the Reserve Bank of India's (RBI) efforts to bolster foreign exchange reserves last year. He noted that robust intervention from the RBI has successfully mitigated more severe declines.
Arora believes the rupee has missed a crucial window of opportunity amid a broader dollar downturn. UBS forecasts a gradual strengthening of the US dollar starting this quarter.
Underlying Pressures
While a potential trade deal could offer near-term support, its impact is likely to be transient, failing to alter the broader negative trajectory for the rupee. Macroeconomic fundamentals, including a deteriorating current account balance and constrained foreign direct investment, are persistently weighing on the currency. Capital flows, now at their lowest point in over a decade, are identified as a critical determinant of the rupee's future movement.
Should an unexpected trade agreement materialize, Arora suggested the rupee might see a brief appreciation to the 88–89 range. However, significant further gains are unlikely, constrained by substantial foreign exchange forward maturities and the central bank's active currency management.
RBI's Stance and Future Outlook
Arora highlighted that the USD/INR pair has historically followed a pattern of higher highs and higher lows since 2019, a trend he expects to continue. The RBI has signaled that annual depreciation of 3-4% is not a primary concern, especially given subdued inflation and still-uneven economic recovery.
The rupee is functioning as a shock absorber, particularly if trade pressures intensify. Arora also pointed out that low inflation provides policymakers room for greater currency flexibility, minimizing potential spillover effects into equity markets. He noted that, on an inflation-adjusted basis, the rupee remains relatively strong compared to the Chinese renminbi.
Looking towards 2026, UBS predicts the rupee may underperform less severely than in 2025 but could still lag some regional peers. The firm expresses more optimism for the Chinese renminbi, citing its external balance and support from Chinese equities. The baseline forecast for USD/INR remains 94, with a best-case scenario of the high-80s if growth accelerates and a trade deal is struck. Conversely, a weaker outcome exceeding 95 is possible if global and trade risks escalate.