Rupee Outlook for 2026: SBI Predicts Modest Decline After 5% Fall in 2025
The Indian rupee experienced a notable decline of nearly 5% against the US dollar in 2025, marking its weakest annual performance since 2022. Despite the broader weakening of the US dollar and gains in many global currencies during the year, the rupee underperformed. However, the State Bank of India (SBI) offers a cautiously optimistic forecast for 2026, expecting the currency to stabilize with a mild depreciation.
Factors Behind the 2025 Rupee Performance
According to a recent report by SBI Funds Management, several factors contributed to the rupee’s underperformance in 2025. Key among these were muted foreign portfolio investor (FPI) inflows, sluggish export momentum, and heightened hedging demand from importers. Foreign investors pulled out nearly $18 billion from Indian equities, influenced by earnings downgrades, limited exposure to artificial intelligence-driven global growth, and more attractive opportunities in other emerging markets.
What Lies Ahead in 2026?
Looking forward, SBI anticipates the rupee will decline by approximately 2% in the financial year 2026, with the exchange rate hovering around 92 against the US dollar. This more moderate outlook is supported by a variety of economic indicators and global market trends.
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Current Account Deficit: India’s current account deficit is expected to remain below 1% of GDP. This is attributable to robust services exports and relatively low crude oil prices, which help maintain external balance.
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Inflation Control: Inflation is projected to stay near the Reserve Bank of India’s (RBI) target of 4%, reducing the potential for major currency shocks that could result from price volatility.
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Global Monetary Conditions: The US dollar is likely to remain supportive as the Federal Reserve approaches the end of its easing cycle. Historically, such a phase tends to create positive conditions for emerging market currencies, including the rupee.
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Real Effective Exchange Rate (REER): The rupee’s REER has depreciated nearly 5% below its estimated fair value, enhancing India’s competitiveness and limiting downside risks.
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Capital Flows: Prospects for capital inflows look more favorable in 2026. Potential inclusion of Indian government bonds in global indices, stabilizing corporate earnings, and renewed foreign portfolio equity inflows could alleviate pressures on the currency.
SBI’s comprehensive outlook reflects a nuanced understanding of the interplay between domestic economic fundamentals and external factors influencing the rupee. While the currency faced headwinds in 2025, the combination of stable macroeconomic indicators and improving global conditions should support a more stable trajectory in 2026. About SBI Funds Management and the TOI Business Desk
The analysis comes from SBI Funds Management, leveraging expertise in financial markets and economic trends. The Times of India Business Desk, responsible for reporting this forecast, is a dedicated team of journalists focused on delivering timely and relevant business news, covering critical sectors and providing in-depth analysis to inform readers about the dynamic business environment.
As 2026 unfolds, market watchers and stakeholders will be closely monitoring how these factors play out, influencing the rupee’s movement and its impact on India’s economy and international trade.
For more detailed insights on market trends, currency movements, and economic policies, stay connected with The Times of India Business section.