More Stories

Informist, Thursday, Jan. 1, 2026

 

By Pratiksha

 

NEW DELHI - The year gone by was an extremely volatile and painful one for the Indian rupee due to the hefty tariffs imposed by the US. And if a trade deal between India and the US is not in place soon, the Indian currency's weak run may be far from over, market participants said.

 

The rupee depreciated almost 5% against the dollar last year, hitting multiple all-time lows, the lowest being 91.0775 per dollar in December. The domestic currency logged its worst yearly fall in three years and emerged as one of the worst performers amongst its Asian peers.

 

The US slapped a 50% tariff on imports from India in August. Since then, both sides have been negotiating a trade deal, with India particularly looking at lower US tariffs on Indian goods while the US has sought more access to the Indian market. Commerce Minister Piyush Goyal had earlier said the two sides would conclude a deal by November. With that deadline having passed, Chief Economic Adviser V. Anantha Nageswaran in December said that India and the US are likely to secure a trade deal by March.

 

The local unit is expected to move in a range of 89.00-93.00 a dollar in 2026 in absence of a trade deal, according to market participants. However, in case of a favourable trade deal, the domestic unit may appreciate to as much as 87.50-88.00, they said. Currency market participants see reduction in US tariffs on Indian goods to 15-20% as a favourable trade deal.

 

RBI GAME PLAN

Amidst the looming uncertainty, the crucial thing to look out will be the Reserve Bank of India's intervention strategy, which was highly unpredictable last year. The central bank was at times hands-off in its defence of the Indian unit, while on some days it went all guns blazing to pull the rupee sharply higher. Case in point: The rupee posted its biggest single-day gain against the dollar in over three years on Dec. 19, appreciating over 1%, all thanks to the RBI. 

 

"We observe the RBI aims to limit speculation and encourage two-way volatility," economists at ANZ Bank India said in a note. "If one-sided market pressures persist for long and fundamentals indeed justify a change, the RBI does allow a controlled adjustment rather than volatile moves and then keeps the exchange rate within a new range. This holding pattern will likely remain."

 

Given the already large depletion in the RBI's foreign exchange reserves and a huge net short outstanding dollar-rupee forward book, most market participants expect the central bank to allow the Indian unit to depreciate gradually in case US tariffs continue to hold. India's foreign exchange reserves were at $693.32 billion in the week ended Dec. 19, almost $12 billion lower than its all-time high, which was touched in September 2024.

 

"The RBI's significant FX reserve drainage suggests a risk of accumulation and less incentive to support rupee if depreciation pressures mount," Nomura said in a report. Between October 2024 and Nov. 21, 2025, Nomura estimates the RBI drained $129.3 billion from its foreign exchange reserves to limit rupee's depreciation, in spot and forwards together.

 

The RBI's net outstanding sales of forward dollars rose for the third consecutive month in November, hitting a seven-month high of $66.05 billion. This was primarily to neutralise the central bank's spot interventions and avoid draining rupee liquidity. 

 

Some market participants are not too optimistic on the outlook for the rupee even if New Delhi secures a good trade deal with Washington. They expect the central bank to make the most of any possible appreciation of the rupee after a deal is announced by stepping in to buy dollars to replenish its foreign exchange reserves. 

 

"A favourable trade deal lowering tariffs on Indian goods to 15-20% could trigger an INR rally, possibly pushing USD/INR down to 88.0–88.50," ANZ Bank India said. "The RBI is expected to counter this strength and build FX reserves."

 

SILVER LININGS

The Indian unit, unlike its Asian peers, could not take much support from an over 9% drop in the dollar index in 2025, largely because of US trade deal uncertainty and strong foreign portfolio outflows.

 

The dollar index, which declined on the back of rate cuts by the US Federal Reserve, is expected to remain on a weaker footing this year as well, as other major central banks are expected to stand pat or tighten policy and as a new Fed Chair takes charge in May - a change that is expected to herald a more dovish tilt for the US central bank. Market participants hope the Indian currency will take comfort from the dollar's decline in the new calendar year.

 

Another solace for the domestic currency is expected to be in the form of likely inclusion of Indian government bonds in Bloomberg's flagship Global Aggregate Index. The index provider had proposed in September to add Indian bonds to its index and this is likely to be confirmed by January. Market participants expect inflows from foreign portfolio investors to rise in the new year and total up to $25 billion in 2026.

 

Further, in case a favourable trade deal with Washington is in place, market participants expect foreign portfolio investors to somewhat make a comeback to the Indian market, further providing support to the Indian unit. In 2025, FPIs withdrew $10.68 billion worth of funds from domestic market, on a net basis, the most in three years.

 

"The core issue for rupee is lack of inflows. Apart from the trade deal, there are multiple issues at hand. There is the AI (artificial intelligence) story, US asset classes, valuations issues, all of it," Anubhuti Sahay, head of India economic research at Standard Chartered, said. "We need a sustainable turnaround of net FDI funds. Otherwise, the rupee may remain on a weaker footing."

 

With multiple uncertainties on the horizon, it seems like the Indian currency may be staring at a volatile new year, unless the apex bank has other plans in mind.  End

 

US$1 = INR 89.96

 

Edited by Vandana Hingorani

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.