The Indian Rupee (INR) has seen a consistent depreciation against the US Dollar (USD) for the last several years and turned out to be the worst-performing Asian currency in 2025. After declining for five straight months, the INR registered a goodish recovery of over 2% in March and recorded its best monthly performance since November 2018. The momentum extended through April and was aided by a broadly weaker USD. The INR touched the yearly high in May, though the selling resumed amid a combination of global and domestic factors. Moreover, the lack of efforts from the Reserve Bank of India (RBI) to stop the slide in the Rupee pushed the USD/INR pair to levels beyond the 91.00 mark, or an all-time peak in December, summing up to the year-to-date rise of over 5%.
USD/INR Weekly Chart. Source: TradingView
Key factors behind Indian Rupee’s decline in 2025
The INR remains on track to register its largest annual decline since 2022 – the year when Russia’s invasion of Ukraine sent oil prices soaring past the $100 per barrel mark. The development dealt a major blow to India, which imports about 90% of its crude. Similarly, a surge in gold imports in 2025 and a fall in US-bound exports, due to steep US tariffs on Indian goods, widened India’s trade deficit to a record high of $41.68 billion in October. Apart from this, trade uncertainties, geopolitical tensions, and foreign capital outflows contributed to a year of record lows for the Rupee.
Trade uncertainties
US President Donald Trump’s administration doubled trade tariffs on Indian shipments to 50%, including a punitive 25% levy from the end of August over Indian purchases of Russian crude oil. Moreover, Trump threatened that he may impose more tariffs on Indian rice. The US is the fourth-largest market for Indian Basmati rice.
Geopolitical tensions
A crisis emerged between India and Pakistan following a terrorist attack in Indian-administered Jammu and Kashmir on April 22, which claimed the lives of 26 civilians. The two countries, however, agreed on May 10 to end hostilities after intense drone and missile strikes. Given the fragile nature of the ceasefire, renewed conflict between the two nuclear-armed neighbours is still not out of the question.
The economic ramifications of a new conflict could end up proving substantial, especially for India, which is currently the world’s fourth-largest economy and is also the fastest-growing major economy in the world. In fact, India’s economy expanded at its fastest pace in 18 months, by 8.2% during the July-September period, following the 7.8% increase registered in the previous quarter. Moreover, the RBI raised its GDP growth forecast for FY2025-26 to 7.3%, up from its earlier estimate of 6.8%.
India’s Quarterly GDP Growth. Source: FXStreet
Weak foreign flows added to persistent selling bias
Despite the upbeat outlook, foreign investors have been pulling money out of Indian equities amid stronger returns elsewhere. US markets have gained 10–15% on average, while Asian markets have delivered 15–35%, and European indices are up 18–30% over the same period. In stark contrast to its global peers, Indian equities have risen only 1–2% in dollar terms since January.
With foreign investors’ net selling of stocks amounting to nearly $18 billion so far this year, India is one of the worst-hit markets globally in terms of portfolio outflows. This coincided with a slowdown in foreign direct investment (FDI) and has been a key factor behind persistent INR selling through the second half of 2025.
Hesitant RBI contributes to the underperformance
Meanwhile, India’s central bank has refrained from aggressive intervention in currency markets to stem a one-way decline in the Rupee, despite its disconnect from broader Asian currency movements. The RBI sold enormous amounts of foreign reserves, over $30 billion in Q3 2022 and $38 billion in Q4 2024. However, in 2025, RBI sold only $10.9 billion in Q3, signaling a pivot away from protecting a fixed exchange rate.
The RBI uses a calibrated approach and buys or sells US Dollars only to prevent disruptive or abnormal price swings. Moreover, excessive selling of dollars would erode foreign exchange reserves and drain liquidity from the domestic banking system, potentially hindering economic growth. The International Monetary Fund (IMF) has reclassified India’s exchange rate regime to a crawl-like arrangement, indicating the RBI’s approach to allow the Rupee to gradually weaken while managing volatility. This could influence how global investors interpret India’s foreign exchange framework and its tolerance for volatility.
Deflation risks overshadow government measures
To address long-standing issues of global investors, India is doubling down on financial sector reforms in a push to beef up capital buffers and lift investment in the country. The Securities and Exchange Board of India (SEBI) has introduced major reforms to simplify the entry process, reduce costs, and enhance the overall attractiveness of the Indian capital market.
The measures, many of which are expected to become fully operational by June 2026, come as Prime Minister Narendra Modi pushes for greater economic self-reliance amid concerns about the hit to India’s economic growth from punitive US tariffs. PM Modi announced to lower Goods and Services Taxes (GST) from October – a move that triggered a small recovery in domestic consumption.
Moreover, the RBI has cut policy rates four times in 2025, bringing it down by a cumulative 125 basis points. However, monetary transmission seems to have reached its limits as consumers are cutting back on discretionary spending. This is visible from the recent sharp fall in India’s Consumer Price Index (CPI), which dropped to a record low of 0.25% in October and signaled deeper economic concerns – weak demand, slowing growth, and rising deflation risks.
With the Wholesale Price Index (WPI) recording a negative print for the second consecutive month in November, India is already experiencing deflationary pressures. An ultra-low inflation reflects stagnant consumer demand, which might create a vicious loop and lead to a slowdown in consumption-driven growth.
India’s Monthly Wholesale Price Index (WPI). Source: FXStreet
Indian Rupee’s road to recovery in 2026
India’s challenge now is not inflation control but demand revival, suggesting that both the RBI and the government need various short-term and long-term solutions to stem Rupee weakness. The RBI’s sizeable USD short forward positions, around $63 billion as of the end of October 2025, limit its capacity for massive spot market interventions. Hence, targeted fiscal policy measures are needed to reignite consumer confidence and boost consumption.
The government may need to accept temporary fiscal slippage and put more disposable income in people’s hands through tax reliefs, wage hikes, or rural support programs. Easing restrictions on Foreign Portfolio Investments (FPIs) and External Commercial Borrowings (ECBs) to make the Indian market more attractive to global investors. Moreover, advocating for the inclusion of Indian bonds and equities in major global indices can ensure a steady stream of foreign capital inflows.
India should also encourage trade settlements in Rupees with other countries, which can lower the demand for US dollars in international transactions. This could support the Rupee, though the pace of recovery will depend on domestic capital flows and may be limited until there is clarity on trade with the US.
India-US trade talks remain in focus
Talks between India and the US showed a clear positive shift in December during Deputy US Trade Representative Ambassador Rick Switzer’s visit. US Trade Representative Jamieson Greer said before the Senate Appropriations Committee that the offers India has made were the best we’ve ever received. Greer added that the US now views India as a viable alternative market to diversify its trade channels.
In response, India’s Commerce and Industry Minister Piyush Goyal said that the US should sign the free trade agreement if the Trump administration is satisfied with the proposals. India’s Chief Economic Advisor (CEA), V Anantha Nageswaran, however, said that the two countries have resolved most of their trade differences and an agreement could happen by March 2026.
Meanwhile, three Democratic lawmakers in the US House of Representatives introduced a resolution that seeks to terminate the national emergency used to justify duties of up to 50% on Indian imports. If passed, the resolution would formally terminate the national emergency declared in August and roll back the additional duties imposed on Indian imports.
Bearish US Dollar could further offer support
The trade optimism should provide some respite to the INR, which, along with the underlying bearish sentiment surrounding the USD, might limit the rise in the USD/INR pair. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, experienced significant volatility this year on the back of global economic shifts and lower US interest rates relative to other major economies.
Russia and China have practically stopped using the USD and are now relying almost entirely on their national currencies for bilateral transactions. Moreover, the broader strategy pursued by the BRICS alliance, seeking to reduce dollar dependence by promoting alternatives, is a significant step towards a more diversified international monetary system and a noteworthy development within the ongoing trend of de-dollarization.
Meanwhile, the US Federal Reserve (Fed) resumed its easing cycle in September and followed up with two more rate reductions in October and December, taking the federal funds rate to a range of 3.5% to 3.75%. Given that signs of softening US labor market conditions have become increasingly evident, the US central bank is expected to lower borrowing costs further in 2026.
Moreover, investors seem convinced that the new Trump-aligned Fed chair will be extremely dovish and slash interest rates regardless of the economic fundamentals. This might contribute to an extension of the USD’s downfall witnessed since the beginning of 2025 as the domestic economy adjusts to the impact of tariffs.
US Dollar Price This Year
The table below shows the percentage change of US Dollar (USD) against listed major currencies this year. US Dollar was the strongest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -11.76% | -6.67% | 0.11% | -4.25% | -6.78% | -3.23% | -12.48% | |
| EUR | 11.76% | 5.74% | 13.45% | 8.50% | 5.57% | 9.68% | -0.81% | |
| GBP | 6.67% | -5.74% | 7.27% | 2.63% | -0.15% | 3.73% | -6.20% | |
| JPY | -0.11% | -13.45% | -7.27% | -4.33% | -6.87% | -3.29% | -12.52% | |
| CAD | 4.25% | -8.50% | -2.63% | 4.33% | -2.75% | 1.07% | -8.60% | |
| AUD | 6.78% | -5.57% | 0.15% | 6.87% | 2.75% | 3.90% | -6.02% | |
| NZD | 3.23% | -9.68% | -3.73% | 3.29% | -1.07% | -3.90% | -9.57% | |
| CHF | 12.48% | 0.81% | 6.20% | 12.52% | 8.60% | 6.02% | 9.57% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
USD/INR 2026 Technical Analysis: Ascending trend-channel favors bullish traders
USD/INR Weekly Chart. Source: TradingView
The formation of an upward-sloping channel on the weekly chart, from the yearly low, points to a well-established bullish trend. However, the overbought Relative Strength Index (RSI) kept a lid on the USD/INR’s breakout through the channel hurdle following the RBI’s intervention in December. The subsequent corrective slide, however, showed resilience below the 90.00 psychological mark, which should now act as a key pivotal point for short-term traders.
A convincing break below the said handle might prompt some technical selling and cause the USD/INR pair to accelerate the fall towards the 89.00 breakout level, now turned support. This is followed by the trend-channel support, currently pegged near the 88.60 region, which, if broken decisively, would suggest that spot prices have topped out in the near-term and pave the way for deeper losses. The pair might then weaken further below the 88.00 mark and test the October 2025 low, around the 87.70-87.65 zone.
On the flip side, bulls might need to wait for some near-term consolidation and acceptance above the 91.00 mark – trend-channel barrier – before positioning for any further appreciating move. Some follow-through buying beyond the all-time peak, around the 91.40 region, will confirm a fresh breakout and set the stage for an extension of a multi-month-old uptrend.
Conclusion
India’s strong economic growth and manageable current account deficit point to a favorable scenario for the INR in 2026. Adding to this, a weaker USD, lower crude oil prices, and the RBI’s deliberate forex interventions back the case for a significant recovery for the Rupee from the recent lows. However, India still faces near-term risks – such as rising import bills, volatility in investor sentiment, and uncertain export recovery. Moreover, a mixture of global shocks and a strategic central bank recalibration to prevent excessive reserve depletion suggests that the road to stability for the INR could be difficult.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
