Whalesbook
Rupee's Sharp Shift
The Indian rupee has undergone a significant adjustment, transitioning from years of structural overvaluation to a state of undervaluation, according to Kaustubh Gupta, Co-Head of Fixed Income at Aditya Birla Sun Life AMC. This sharp reset stems from global tariff shocks and a hardening international trade regime, forcing markets to reprice India's external risks.
Past Strength Fades
For nearly a decade, the rupee maintained a 3-4% premium on a Real Effective Exchange Rate (REER) basis. This stability was underpinned by productivity gains, India's capacity to absorb capital inflows, and deliberate policy to manage the current account deficit. However, this supportive framework has begun to erode.
Trade Policy Impact
Gupta noted that expectations of India remaining insulated under a potential Trump presidency were dashed when the U.S. imposed tariffs on allies like Japan and NATO members. This escalating protectionism has directly impacted currency markets.
Trade Deal Outlook
"We are assuming that in the next three months, we have a trade deal in our hand," Gupta stated. He anticipates the rupee will move closer to its fair valuation, which he places near 89 against the US dollar.
Recent Pressures
The rupee has faced considerable pressure since the U.S. enacted tariffs affecting numerous countries, including India. This led to fund outflows from both equity and debt markets. The currency even breached the 91 per USD level, prompting significant intervention from the Reserve Bank of India (RBI) to stabilize the market.
Headwinds Without Agreement
Without a trade accord, the negative pressures are expected to persist. Policymakers may allow further rupee depreciation to shield the economy from higher tariffs and subdued external demand. Capital flows remain a critical, secondary variable influencing the currency's path.
Asia's Worst Performer
Data indicates the Indian rupee has been the weakest currency in Asia, depreciating by 4.75% in 2025. It continued its downward trend in early 2026, falling an additional 0.10%. The currency is currently trading around 89.9675 against the dollar amid a weaker greenback and lower crude oil prices.
Inflationary Concerns
Looking ahead, Gupta forecasts inflation to settle at 4.5% for the fiscal year 2027. This figure is approximately 50 basis points higher than the RBI's Q2 FY27 projection of 4.00%, with climate conditions and monsoon uncertainty contributing to upward pressure on food inflation.