Can the rupee stage a comeback?

The Indian currency declined over 6% in 2025, weighed down by weak capital flows, trade uncertainties and shifting RBI strategy

- Subhana Shaikh

After plummeting over 6% in 2025 and breaching the psychologically-important 90-per-dollar mark, the Indian rupee is heading into 2026 carrying the weight of weak capital flows, global trade uncertainty and shifting central bank strategy.

Yet, beneath the headline depreciation, economists and market participants said the outlook for the currency next year is far from one-way depreciation and hinges crucially on how the external sector evolves, especially India’s trade deal with the US.

At the heart of the debate is whether this year’s weakness marks the start of a more prolonged down-cycle or a painful, but necessary adjustment.

“Typically, the rupee needs to depreciate to the extent of the interest rate differential between the US and India, but the reality is that the external front has been hit hard by US tariffs,” Neeraj Gambhir, executive director at Axis Bank said, “Therefore, the outlook for next year is significantly dependent on the outcome of tariff discussions.”

In an optimistic scenario, clarity on tariffs between India and the US by early 2026 could help reverse export losses, draw back equity investors, and lift sentiment around India.

“If all these things materialize, you will potentially end up seeing either no depreciation or a very mild depreciation in the rupee next year,” Gambhir said, adding that the currency could hover around current levels of 90-91 to the dollar in such a case.

The pessimistic scenario is less forgiving. If trade negotiations falter and external pressures persist, markets should brace for “another 3-4% depreciation”, potentially pushing the rupee closer to 95 to a dollar, Gambhir said.