New Delhi [India], January 3 : The pace of rupee depreciation is expected to slow significantly in 2026, after the Indian currency endured its weakest year since 2022 amid foreign fund outflows, trade uncertainty and elevated hedging demand, according to SBI Funds Management.
The rupee fell close to 5% in 2025, underperforming most emerging-market peers even as the US dollar weakened globally.
However, SBI Funds Management's 2026 Outlook projects the currency to depreciate by only around 2% in FY27, with the exchange rate expected to stabilise near Rs 92 to the dollar.
The outlook is supported by several factors. India's CAD is projected to remain below 1% of GDP, aided by strong services exports and subdued oil prices. At the same time, the US dollar is expected to stay on a softening bias as the Federal Reserve nears the end of its easing cycle, a backdrop that has historically supported emerging-market currencies, the report said.
Capital flows could also turn more favourable. Potential inclusion of Indian government bonds in global bond indices, stabilisation in corporate earnings, and the likelihood of renewed FPI equity inflows may ease pressure on the rupee.
Additionally, the rupee's real effective exchange rate has fallen to about 5% below its estimated fair value, improving competitiveness and limiting downside risks.
Looking ahead, SBI Funds Management expects a more supportive backdrop for the currency. India's current account deficit is projected to remain below 1% of GDP, supported by strong services exports and subdued crude oil prices. Inflation is expected to stay anchored around the RBI's 4% target, reducing the risk of macro-driven currency shocks.
Global factors are also turning favourable. The US dollar is expected to remain on a softening bias as the Federal Reserve approaches the end of its easing cycle, a scenario that has historically supported emerging-market currencies. In addition, the rupee's real effective exchange rate has fallen to about 5% below its estimated fair value, improving competitiveness and limiting downside risks.
The Indian rupee recorded its sharpest annual fall since 2022 in 2025, depreciating close to 5% against the US dollar, even as the greenback weakened globally and most emerging-market currencies strengthened. The underperformance, analysts say, was driven less by domestic macro stress and more by capital outflows and prolonged trade-related uncertainty.
The rupee came under pressure primarily due to muted foreign portfolio investor (FPI) inflows, weak export momentum and heightened hedging demand from importers. FPIs sold nearly USD 18 billion worth of Indian equities in 2025, amid earnings downgrades, limited exposure to global artificial intelligence-led growth themes, and better relative opportunities in other emerging markets.
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