Indian Rupee weakness to continue through 2026: Report
New Delhi, December 27
The Indian rupee is expected to show more weakness going ahead into 2026, according to a report by MUFG, a global financial group.
In a report earlier this month, it forecast more weakness for the Indian rupee. It expects the Indian rupee to appreciate modestly above the 90 level in 2026, targeting 90.80 by the September 2026 quarter.
"We have already been expecting INR to weaken and underperform, although we note FX outflow pressures have been more acute than we have anticipated thus far. Our forecasts also imply continued INR weakness against key FX crosses such as EUR (Euro), JPY (Japanese yen) and CNY (Chinese Yuan)," the report read.
It has also been asserted that higher import needs and soft net FDI may weigh on the Indian rupee.
Indian rupee breached the 90 mark against USD in early December, extending its depreciation run through sessions now, and in the process, hitting a fresh all-time low for the Indian currency.
"Our FX forecasts reflect our expectation for a wider current account deficit of 1.5 per cent of GDP and soft net FDI flows. These should offset some improvement in portfolio inflows with our expectation of an eventual trade deal between US and India, where we assume tariffs will be lowered to 25 per cent from 50 per cent by early 2026," the MUFG report read.
Against that backdrop, MUFG expects RBI to intervene to cap Rupee depreciation actively.
At the same time, it thinks the fundamentals ultimately imply some pressure for the Rupee to weaken, and as such for the RBI to eventually allow the Rupee to break above 90 over time.
Risks, however, tilt towards more Rupee weakness.
"Our forecasts are certainly sensitive to tariff assumptions. If a trade deal between the US and India to lower tariffs is not reached, the bias would tilt towards further INR weakness and more RBI rate cuts, even as India's domestic economy should continue to cushion India's overall GDP," it noted.
"It's important to emphasise we are not overly bearish on INR (Rupee) at current levels given cheaper FX (foreign exchange) valuations, coupled with stronger momentum for structural reforms which could over time unlock the binding constraints to growth. We have already seen India's government accelerate reforms such as simplification of the GST and consolidation of labour codes, policy moves which probably would not have been possible without the external shock from the 50 per cent tariffs. With the momentum on reforms picking up, coupled with recent wins on state elections by the incumbent government, we think FX vol can remain reasonably contained unlike in past cycles."
MUFG raised India's GDP forecasts to 7.6 per cent for 2025-26 and 7.1 per cent for 2026-27, on the back of stronger domestic demand from GST tax cuts, better rural activity, and the assumption of a trade deal with the US by early 2026.
"From a growth perspective, the direct impact of tariffs on India's exports has been small so far, with some redirection of exports to markets such as the EU, China and the UAE. This is not to say that tariffs will not bite, and we think the longer tariffs stay at elevated levels the more prominent the negative impact will be. As a working assumption, we see tariffs lowered to 25 per cent in early 2026, down from the current 50 per cent, but higher than India's key export competitors. As such, while goods and services exports could soften, we think the downside should be capped by an expected trade deal," it has noted in the report.
The lagged impact of easier monetary policy should also provide some support to domestic demand in 2026, the MUFG report said.
— ANI
Reader Comments
The focus on a potential US trade deal is key. If tariffs are lowered to 25%, it could provide some stability. However, forecasting to 2026 seems like a long shot in today's volatile global economy. Let's hope the structural reforms (GST, labour codes) start showing positive results sooner.
As someone who sends money to family back home, a weaker rupee is actually good news for NRIs! 💸 But I understand it's a double-edged sword. The report's point about "softer net FDI" is worrying. We need to make India a more attractive destination for long-term investment, not just portfolio flows.
The report itself says they are "not overly bearish." The GDP forecasts are very strong at 7.6%! A slightly weaker currency can boost exports if managed well. The key is controlling inflation so that domestic demand isn't hit. Jai Hind! 🇮🇳
With respect, I find these long-term forex predictions from foreign banks often miss the mark. Our economy has shown resilience. The focus should be on reducing import dependency, especially in energy, to strengthen the rupee's fundamentals. 'Make in India' is more important than ever.
Interesting analysis. The link between US tariffs, a potential deal, and the rupee's path is clearly outlined. The risk of no deal leading to more weakness and RBI rate cuts is a scenario planners should prepare for. The redirection of exports to EU, China, UAE is a smart adaptive move by Indian businesses.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.