By Anagh KeremuttFor much of 2025, the Indian rupee weakened, despite a healthy economy. India has seen GDP growth that’s among the highest in the world, inflation has eased, and expectations are upbeat. RBI Governor Sanjay Malhotra said that the economy is in Goldilocks mode, with most indicators looking great. But uncertainty was a party spoiler, as it increased dollar demand and put pressure on the rupee. The RBI under the new governor also became less interventionist in defending the rupee, and focused mainly on limiting volatility.
By end-2025, the rupee had slipped past Rs 91 per dollar and hovered near record lows, making it one of Asia’s weakest currencies. US rate signals, geopolitical risks, and cautious investor sentiment triggered fresh selling each time.
It’s early, but 2026 looks different. The US–India trade deal cut tariffs on Indian goods, lifting a key drag on the rupee. India’s $500 billion import pledge to the US sets a clear five-year trade path towards more openness and reduces uncertainty. Foreign investors have returned, and the rupee strengthened toward the 90 range.
Following the India–US trade agreement, Bank of America lifted its near-term rupee forecast by about 2% to around Rs 89 per dollar. “Rupee was under pressure due to the outflows in the last month, and I think that should stop,” said Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America.
Currently, the rupee is down 4.3% over the past year and continues to lag most Asian peers.In this edition of Chart of the Week, we see the structural forces behind the rupee’s slide and the policy shift under new central bank leadership.
The rupee stayed under pressure in 2025, but 2026 looks different
The rupee’s weakness in 2025 was largely from global factors rather than domestic fundamentals. India’s growth outlook remained intact, but external conditions worked against the currency through most of the year.
Tariffs and the souring of the Modi-Trump relationship didn’t help In 2025, tariffs on Indian goods were raised to 50% in response to continued Russian oil purchases. This reduced export competitiveness and weakened visibility on future export orders and dollar inflows. Foreign investment outflows added to the pressure. As US interest rates remained higher for longer, global investors reduced exposure to emerging markets. India saw $18.9 billion of foreign portfolio outflows in 2025, increasing dollar demand and keeping the rupee under strain.
Asia added another layer of stress. Japan’s shift toward tighter monetary policy led to an unwinding of the yen carry trade. Investors who had borrowed cheaply in yen and invested in higher-yielding markets, including India, began withdrawing funds. This hit the rupee at a time when it was already under pressure.
The trade deficit widened as high crude oil prices and gold imports pushed up India’s import bill. Services exports and remittances continued to provide support, but they could not fully offset the goods trade gap. Finance Minister Nirmala Sitharaman confirmed that currency movements were driven primarily by global uncertainty and trade disruptions rather than domestic weakness.
RBI keeps a light touch, intervening only when needed
One of the most important changes in 2025 has come from the Reserve Bank of India. Under Governor Sanjay Malhotra, the central bank has shifted from defending exchange-rate levels to a looser approach: managing volatility.
In earlier episodes of rupee stress, the RBI intervened actively to slow depreciation. While this offered short-term relief, it also encouraged markets to test perceived comfort zones, increasing the long-term cost of intervention.
The current approach is different. The RBI has made it clear that it is not targeting a specific exchange rate for the rupee. Intervention is reserved for disorderly movements, not routine weakness. As Governor Malhotra said, “We allow the markets to determine prices and don’t target any level. Intervention is only to curb abnormal volatility”
With no clear level to defend, traders are less willing to take aggressive one-way positions. This approach is supported by strong reserves. India’s foreign exchange reserves of $723.8 billion cover more than eleven months of imports. Even as RBI gold purchases slowed to an eight-year low, a $137 billion gold-heavy buffer backed by record holdings of 880.2 tonnes gives the RBI greater capacity to manage shocks and supply dollars during periods of stress.
Higher gold valuations have given the RBI greater flexibility to absorb currency stress without heavy dollar sales. The message from the February 2026 policy meeting was consistent: stability matters more than levels. While this stance has not strengthened the rupee outright, it has reduced panic and helped anchor expectations after a volatile year.
Trade deals have changed the tone in 2026
If RBI policy helped steady the rupee, trade developments helped change market perception.
The India–US trade framework has marked a clear turning point. Tariffs that had risen to approximately 50% were reduced to approximately 18%, thereby restoring export competitiveness. More importantly, the deal improved predictability, giving exporters clearer visibility on pricing, volumes, and market access.
Markets responded quickly. After spending months near its weakest levels, the rupee recovered toward Rs 90 per dollar following the announcement. The move was driven less by speculative flows and more by expectations of trade-linked dollar inflows.
Progress on the India–EU free trade agreement added further support. While benefits will emerge gradually, the agreement will improve access to a broad range of Indian goods. For currency markets, this matters because trade-linked inflows tend to be more stable than short-term capital flows.
As a result, the rupee traded in a narrower range through early 2026. The improvement was modest, but the driver had changed. Trade, rather than sentiment, has begun setting the tone.
What comes next: stability over strength
At its February 6 meeting, the RBI unanimously held rates at 5.25% with a neutral stance and raised its FY26 GDP growth forecast to 7.4% while upgrading early FY27 estimates. Strong growth attracts foreign direct investment, which is more stable than portfolio flows and helps fund the trade gap. This keeps the rupee steady in 2026, balanced rather than bullish.
At the same time, execution risks remain. Trade agreements must translate into actual export volumes. Any slowdown in global demand, delays in implementation, or logistical constraints could test current stability. Fiscal discipline will also remain a focus, with markets monitoring tax collections and spending trends.
Several global banks expect the RBI to remain comfortable with gradual depreciation over time, especially if it supports export competitiveness. Forecasts pointing to Rs 91–92 by late 2026 reflect policy tolerance rather than renewed stress. As UBS noted, “Short-term support for the rupee is limited because the central bank will use strength to build reserves, keeping some pressure on the currency.”
After a difficult 2025, the currency is no longer reacting blindly to every global shock. The shift from defending levels to managing stability has changed market behaviour. Whether this holds will depend on trade execution and policy.