The rupee likely will face fresh assault in 2026 and depend on the Reserve Bank of India’s support to move in the 92-per-dollar neighbourhood as a trade deal with the US continues to elude and foreign fund outflows persist.

The old factors at play can even put the Indian currency under a downward bias to slip past the 93-mark in the first half of the year as exports to the US remain under pressure due to Washington’s stiff 50% tariffs on Indian goods. US President Donald Trump and Prime Minister Narendra Modi are nowhere near a trade settlement.

The signing of an historic trade pact with the European Union (EU) and a weaker dollar index can provide some support but it is not cushion enough to stem the slide. The implementation of the deal is still a year away as all the EU member states have to give their consent.

“The EU-India agreement will have negligible impact in the near term. Even the announcement of the deal has not caused any knee-jerk reaction and the rupee has failed to appreciate against the dollar. At the ground level, the procedures will involve signing a lot of documents and the trade gains will come after a lag effect,” said Ritesh Bhansali, deputy CEO at Mecklai Financial Services.

On Wednesday, the day after signing of the deal, the rupee ended weaker at 91.78 per dollar, marginally down from 91.72 the previous close. The day after, the rupee plunged further to a record low closing of 91.98 per dollar, surpassing the previous level of 91.96 last week.  

Forex analysts say 2026 will continue to be a difficult year for the rupee, after depreciating by around 5% against the dollar last year. Global volatility amid geopolitical uncertainty is going to intensify this year, with Trump’s unpredictability contributing to the storm.

“There is nothing to indicate that the tide will change for the rupee. There are too many global factors at play. Despite the deal with the EU, it doesn’t look like the problems of the rupee will go away this calendar year. The pressure of capital outflows in 2025 persists,” said Bhansali. 

The Indian currency has already depreciated 2% in January even as foreign portfolio outflows have touched $4 billion in the first month of 2026. On 23 January, it sank to its lifetime low of 92-per-dollar but recovered later in the day to settle at 91.88 and since then has held on with the RBI support.  

The longer the foreign capital inflows stay weak and the handshake between Trump and Modi is off, the higher the pressure the rupee will face on sinking deeper. 

Making the rupee’s journey difficult could also be the unwinding of yen carry trades this year. The equity markets across the world could be sent into turmoil as the risks of the first joint US-Japan currency intervention in 15 years is on the radar. The unwinding would mean further foreign capital flight from India.

Analysts say the weakness of the rupee, seen last year, has not ended. The fall of the rupee in 2025 was the steepest in three years, as foreign investors pulled out around $18 billion from Indian equities. Tariffs and absence of a US-India trade deal also weighed on the rupee and it breached the 90-mark for the first time on 3 December. In less than two weeks after that, it sank to a new low of 91.14 against the greenback but further slide that month was prevented due to the RBI’s currency interventions.

“The rupee was among the worst performing currencies in 2025 depreciating ~5.0% in 2025. The dollar index (DXY) declined 9.4% amid concerns over US economic growth following the Tariff announcements. Widening trade deficit, FPI (foreign portfolio investment) outflows and cautious sentiment amid a prolonged delay in the India–US trade deal weighed on the rupee,” IDFC First Bank said in a note. 

Some currency analysts say the rupee will not see a sharp depreciation this year and will trade within a range. The forces working against the rupee last year may somewhat course correct in 2026. A framework trade deal in some form would help the rupee and any further periods of stress would possibly be accompanied by the RBI intervening in markets. 

“The result is likely to be rupee being much more range bound this year, with the depreciation capped at 3-4%,” said Bernstein in a report.

For the Indian economy to be competitive against its Asian peers, the RBI a couple of years back allowed the market forces to depreciate the rupee. Currently, it is intervening in the market to contain volatility and prevent the Indian currency from a dramatic fall.

“If the RBI wouldn’t have stepped in from time to time, the rupee would have already plunged to the 93-per-dollar levels,” said a forex analyst.

While a temporary bounce back of the rupee is not ruled out, only few believe that it could regain ground and hover around the 89-mark. Even a turnaround from the negative sentiment and a rally towards positivity would not help the rupee to sustain at those levels.

“We could see a temporary upward thrust but I don’t foresee the rupee stabilising at those levels this year. The average depreciation of the rupee for the full calendar year could be 92.5 against the dollar, with a chance of it slipping to a low of 93.5-94 and then surfacing higher,” said Bhansali.

The rupee’s strength against the dollar will depend on geopolitical forces, which has come under stormy clouds in the first month of 2026 itself. Military attacks are threatening to spread beyond the ones seen last year in the Russia-Ukraine and Israel-Gaza regions, the impact of which could lead to a rise in oil prices. 

Trump’s emphasis on American dominance in the Western Hemisphere has created an uncertain climate, starting with the attack on Venezuela and his notice to Cuba, Colombia and Greenland. “Cuba is ready to fall”; Colombia is “run by a sick man”; and anything less than US control of Greenland is “unacceptable”. These words are ominous and, if followed by action, can spell further political and economic turmoil. 

Outside, Iran is a target and Trump has imposed a 25% tariff on countries dealing with that regime. “Iranian patriots, keep protesting – take over institutions… help is on its way,” he said in a post on TruthSocial. 

In this uncertain environment, reversing mute capital inflows will be a continuous challenge. The rupee in 2026 will be torn between Trump’s tariffs, capital outflows and the EU pact.

Will the scene change for the rupee if a trade deal with the US is stitched after the pact with the EU? “Capital inflows is the missing piece. Only that can strengthen the rupee,” said Bhansali.