Rohit Arora, Head of Asia FX & Rates Strategy at investment bank UBS, predicts that the Indian rupee, which saw a significant decline in value in 2025, would weaken by an additional 4% in 2026 and might reach the 94-mark versus the US dollar.
Indian Rupee Outlook and UBS Forecast
He went on to say that this is due to the US-India trade agreement’s delay as well as India’s declining nominal GDP, which is causing capital to leave the nation.
Due to the trade deal’s delay, the Indian rupee has been under pressure in recent months, reaching new all-time lows. However, the RBI’s little assistance was actually making things worse.
Trade Deal Delays and RBI Intervention
Even while the overall macroeconomic environment is still relatively steady, the currency fell from 85 to 90 in only 231 days, indicating increasing stress in the foreign exchange market. The central bank intervened sharply when the local currency hit a record low and surpassed 91 in December.
Currency observers note that demand for the US dollar as a safe haven, higher US rates, and caution ahead of a possible trade deal between the US and India have all contributed to the decline’s acceleration during the last two quarters.
Safe-Haven Dollar Demand and Market Stress
📉 Indian Rupee Under Pressure
- UBS Projection: INR may weaken 4% to 94/USD in 2026
- Key Triggers: US-India trade deal delay, capital outflows
- Macro Factors: Declining nominal GDP, high US interest rates
- Market Stress: INR fell from 85 to 90 in 231 days
- RBI Action: Sharp intervention after record lows
The demand for dollars from importers and hedgers has increased as the two biggest countries in the world launch tariff salvos that impact Indian exports, putting pressure on the rupee.
After the dollar index sank due to weaker US manufacturing, the local currency is now trading over 90 levels with minimal appreciation. The Indian rupee ended the day at 90.1763 vs the US dollar.
Tariffs, Imports, and Dollar Index Impact
After a three-day losing trend, the Indian Rupee regained ground versus the US dollar. The demand for the US dollar as a safe haven declines as the likelihood of a conflict between the US and Venezuela lessens. In the Indian stock market, FIIs have sold shares totaling Rs. 3,015.05 crore so far in January.
Following a three-day losing skid, the Indian Rupee (INR) is trading higher versus the US dollar (USD) on Tuesday. The USD/INR pair corrects to around 90.35 as the US Dollar Index (DXY) dramatically declines after Monday’s new, more than three-week low of 98.86. The demand for safe-haven assets has decreased as the risk-averse mindset has lessened, putting pressure on the US dollar.
FII Outflows and Dollar Weakness
⚠️ USD/INR Volatility Watch
- Risk Factors: Trade tensions, foreign fund outflows
- Political Risk: US warning on India’s Russian oil purchases
- Market Sentiment: Shift between risk-on and risk-off
- Key Levels: Support near 20-day EMA, resistance at 91.55
- Outlook: Continued uncertainty for Indian Rupee
Following the US assault on Venezuela and the arrest of President Nicolas Maduro on drug-trafficking accusations, the US dollar saw a significant increase on Monday as market sentiment shifted toward risk aversion.
In the meanwhile, the Indian Rupee’s future is still uncertain because of the ongoing withdrawal of foreign capital from the Indian stock market and the resurgence of trade tensions between the US and India.
Geopolitical Risks and Capital Flows
President Donald Trump of the United States warned on Monday to raise taxes on India if it keeps purchasing oil from Russia. Trump said, “If India does not get assistance on the Russian oil problem, we may put taxes on them.”
Regarding international flows, foreign investors are still selling their shares in the Indian stock market. In the first three trading days of January, foreign institutional investors (FIIs) sold off their interest for Rs. 3,015.05 crore. The value of the shares sold on Monday, however, was far less than the usual sale, at Rs. 36.25 crore.
Political Statements and FII Selling
The unexpectedly poor US ISM Manufacturing Purchasing Managers’ Index (PMI) data for December on Monday is another factor contributing to a significant decline in the US dollar.
According to the report, the Manufacturing PMI fell once again, this time more quickly, from 48.2 in November to 47.9. Economists predict that the statistics will be somewhat higher, at 48.3. The statistics also revealed a slight fall in the manufacturing sector’s sub-components, including employment and the New Orders Index.
US Manufacturing Data and Dollar Pressure
The US economy’s prospects have come under scrutiny due to the industrial sector’s steadily falling activity.
The Nonfarm Payrolls (NFP) data for December, which will be released on Friday, will be the main driver of the US dollar this week.
Upcoming US Economic Triggers
Investors will closely monitor official US employment statistics in order to get new insights into the status of the labor market. In order to sustain deteriorating labor market circumstances, the Federal Reserve (Fed) lowered interest rates three times in 2025, bringing them down to 3.50%–3.75%.
UBS anticipates that the Fed will lower interest rates in July and October of this year. The core Consumer Price Index (CPI) may increase by 44 basis points (bps), 50 basis points (bps), and 30 basis points (bps) in December, January, and February, respectively, according to the investment banking-to-financial services led organization, which has raised estimates from January and September.
Federal Reserve Policy and Inflation Outlook
Investors will be keeping a close eye on the JOLTS Job Openings data for November and the ADP Employment Change and ISM Services PMI data for December on Wednesday.
USD/INR is trading at 90.3765 on the daily chart. Following the recent decline, the pair continues to maintain above the rising 20-day Exponential Moving Average (EMA) at 90.2305, which supports the larger uptrend. Although the average’s slope has flattened, price activity still regards it as dynamic support.
USD/INR Technical Outlook
The 14-day Relative Strength Index (RSI) at 55.20 (neutral) maintains a little bullish near-term bias by indicating consistent momentum without overbought pressure.
Sustained closes above the short-term average would boost momentum and give the pair a chance to return to its all-time high of 91.55. Conversely, a daily close below the 20-day EMA would reverse bias and provide space for more retracement in the direction of the December low of 89.50.
Key Factors Influencing the Indian Rupee
What effects does the Indian economy have on the Indian Rupee?
The Indian economy has grown at one of the quickest rates in the world, averaging 6.13% between 2006 and 2023. India has drawn a lot of international investment due to its rapid expansion. This covers foreign funds’ Foreign Indirect Investment (FII) into Indian financial markets as well as Foreign Direct Investment (FDI) into tangible projects. The demand for the Rupee (INR) increases with the amount of investment. INR is also impacted by changes in the demand for dollars from Indian importers.
Economic Growth and Capital Inflows
What effect do oil prices have on the rupee?
The price of oil may directly affect the Rupee since India imports a significant amount of its gasoline and oil. Since oil is mostly sold in US dollars (USD) on international markets, an increase in the price of oil would result in an increase in the aggregate demand for USD, which will cause Indian importers to sell more Rupees in order to fulfill that demand, depreciating the Rupee.
Oil Prices and Import Costs
What effect does India’s inflation have on the Rupee?
The impact of inflation on the Rupee is complicated. In the end, it signifies a rise in the money supply, which lowers the total value of the Rupee. However, the Reserve Bank of India (RBI) will boost interest rates to lower it by cutting lending if it above its 4% objective. The Rupee gains strength with higher interest rates, particularly real rates (the difference between interest rates and inflation). They increase the profitability of parking money in India for foreign investors. The Rupee may benefit from a decline in inflation. Lower interest rates, however, may cause the Rupee to weaken.
Inflation, RBI Policy, and Interest Rates
What effect does seasonal demand for US dollars from banks and importers have on the Rupee?
For the most of its recent history, India has had a trade imbalance, meaning that its imports exceed its exports. Due to seasonal demand or order glut, there are occasions when the large amount of imports results in substantial demand for US dollars since the bulk of international commerce is conducted in US dollars. The Rupee may depreciate at these times due to heavy sales to satisfy the demand for dollars. Increased market volatility may potentially lead to a sharp spike in demand for US dollars, which would be detrimental to the Rupee.
Conclusion
The Indian Rupee remains weak due to foreign fund outflows, high US interest rates, trade uncertainties, and strong dollar demand. If these pressures continue, the rupee could face further depreciation, with UBS projecting levels near 94/USD in 2026.
Disclaimer
This is for informational purposes only and not investment advice. Currency markets involve risk. Please consult a financial advisor before making decisions.
