The rupee slipped past 90 to the dollar on December 3, marking a record low. It has weakened around 5% so far this year, making it Asia’s worst-performing currency. The rupee closed at 89.98 per dollar on Friday.
“With uncertainty around a trade deal and withdrawal of foreign portfolio investment (FPI), we are looking at a situation of 90+,” said Madan Sabnavis, chief economist at Bank of Baroda.
Sakshi Gupta, principal economist at HDFC Bank, said the currency may remain choppy. “We see two-way volatility in the rupee in the near term,” she said.
A US-India trade deal announced by end-December, along with potential Federal Reserve rate cuts, could temporarily support the rupee, Gupta noted. However, she said any gains would likely be capped as the RBI rebuilds reserves and adjusts its forward book. She expects the USD/INR rate to settle around 87.5-89 by March. “In the absence of a trade deal, the USD/INR is expected to trade in the range of 89-91 by March 2026,” she said.
India currently faces a 50% US tariff-25% of which is a penalty linked to imports of Russian oil. US trade negotiators are expected to visit India this week to discuss the bilateral trade agreement (BTA), with the first tranche focusing on tariff issues.
Seasonal trends may offer some relief next year, said Gaura Sengupta, chief economist at IDFC First Bank. “Beyond the trade deal, seasonal factors are expected to support the rupee in Q4 FY26, when the trade deficit narrows and the balance of payments tends to be in surplus,” she said.However, Sengupta warned that the absence of a trade deal would weigh on the FY27 current account deficit (CAD), with the 50% tariff adding nearly 0.3% of GDP to FY27 CAD. “In such a scenario, the pace of depreciation in the rupee will remain on the higher side.”
HDFC Bank expects the CAD to widen to 1.1% of GDP in FY26, while IDFC First Bank projected a deeper deficit of 1.6%, compared with 0.6% in FY25.
The RBI cut its policy rate by 25 basis points on Friday. Gupta said the move is likely to have only a temporary impact on the currency, noting that the trade deal outcome and capital flows will remain the dominant drivers. She expects depreciation pressure to persist over the next 8-12 months, regardless of the trade deal.
Limited Impact on Inflation
Economists do not expect the rupee’s weakness to significantly fuel inflation, given lower food prices and recent goods and services tax (GST) rationalisation.
“Inflation at present would be impacted more by trends in food prices, given that commodity prices are benign,” said Paras Jasrai, associate director at India Ratings and Research (Ind-Ra). “There will be some impact on core inflation through gold and jewellery prices, but most of it will be offset by lower food prices,” he added.