India's Rupee in Freefall: Can a US Deal & Weak Dollar Rescue It by 2026?

The Indian Rupee is navigating a challenging period, having hit record lows and emerging as the weakest currency in Asia. Forex traders anticipate a rebound in the latter half of the 2026 calendar year, following a period of volatility. The currency is expected to trade in a broad range of 87.00–92.00 against the US dollar in 2026.

Key Factors Driving Rupee's Weakness

• The prolonged delay in finalizing a trade deal with the United States has significantly contributed to the rupee's 5.39% decline this year, marking its sharpest annual fall since 2022.
• Steep US tariffs, reaching up to 50% on Indian goods, are negatively impacting exports to the US, India's largest market. This also dampens foreign investors' appetite for Indian equities.
• Foreign portfolio investors (FPIs) have been net sellers in both debt and capital markets throughout 2025, withdrawing Rs 70,976 crore from domestic financial markets according to National Securities Depository Ltd. data, putting further pressure on the Indian currency.

Reserve Bank of India's Stance

• After consistently supporting the rupee in the previous year, the Reserve Bank of India has eased its intervention efforts. Analysts suggest the RBI is comfortable with the rupee depreciating slightly, especially given India's low inflation.
• The central bank might prioritize flexibility in monetary policy and maintain trade competitiveness in 2026, rather than aggressively defending the rupee. Its ability to safeguard the currency is also limited by its short-dollar position in forwards.

Future Expectations and Dollar Index Outlook

• A recovery for the rupee hinges on achieving clarity in the US-India trade deal and a broad weakness in the US dollar index.
• The dollar index is projected to have a bearish structure in 2026, potentially declining towards the 92–93 level in the latter half of the year.
• Key events influencing the dollar include the nomination of a new US Federal Reserve chair, who is expected to adopt a dovish stance, leading to faster rate cuts and potentially the resumption of quantitative easing by the US Fed.
• The ongoing de-dollarisation theme, where central banks diversify reserves, is also expected to continue.

Impact

• The depreciation of the Indian Rupee can increase the cost of imports, potentially leading to higher inflation. Conversely, it makes Indian exports cheaper, boosting competitiveness for domestic businesses selling abroad. Foreign investment sentiment is also significantly affected, influencing stock market inflows and valuations.
• Impact Rating: 8/10

Difficult Terms Explained

• Forex Traders: Professionals who buy and sell foreign currencies in the foreign exchange market.
• Dollar Index: A measure of the value of the United States dollar relative to a basket of foreign currencies, weighted by the trading partners' commerce during the base period.
• Trade Deal: An agreement between two or more countries to reduce or remove barriers to trade, such as tariffs and quotas.
• Tariffs: Taxes imposed on imported goods.
• Foreign Portfolio Investors (FPIs): Investors who invest in the securities of a country but do not engage in the direct management of those investments; they include institutional investors like mutual funds, pension funds, and hedge funds.
• Reserve Bank of India (RBI): India's central bank, responsible for monetary policy and regulating the country's banking system.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Short-dollar position: A financial position where an entity expects the value of the US dollar to fall relative to other currencies.
• Forwards Market: A financial market where participants can buy or sell assets at a predetermined price for delivery at a specified future date.
• Dollar Index (DXY): (Already explained above, but often referred to simply as the Dollar Index)
• Dovish: Describes a monetary policy stance that favors lower interest rates and easier credit conditions to stimulate economic growth.
• Federal Open Market Committee (FOMC): The monetary policymaking body of the Federal Reserve System.
• Quantitative Easing (QE): A monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy to expand economic activity.
• De-dollarisation: The process of reducing the dominance of the US dollar in international trade, finance, and as a reserve currency.