The Indian rupee had a year most policymakers and investors would rather forget. As they look ahead, the Rupee outlook for 2026 remains a topic of significant interest.

The rupee outlook 2026 is drawing attention after the Indian currency recorded a nearly 5% fall against the US dollar in 2025, its weakest annual performance since 2022. While many global currencies strengthened amid a softer dollar, the rupee lagged behind, raising fresh questions about where the Indian currency may head in 2026.

Now, as 2026 begins, the obvious question is whether 2025 was an anomaly or a warning sign.

According to a recent report by SBI Funds Management, the outlook is more nuanced than outright pessimism. The rupee may not dramatically rebound this year, but neither is it headed for a free fall. Instead, SBI expects a measured decline of around 2% in FY26, with the exchange rate hovering near ₹92 to the US dollar.

That forecast reflects both lingering vulnerabilities and some important structural cushions supporting the currency.

So, what exactly went wrong in 2025? And why does SBI believe the pressure may ease, though not fully disappear, in 2026?

Let’s break it down.

Why the Rupee Underperformed in 2025

On paper, 2025 should not have been such a difficult year for the rupee. The US dollar softened, global risk appetite improved, and several emerging market currencies gained ground. Yet India’s currency lagged behind.

SBI Funds Management points to three major headwinds that weighed on the rupee last year.

First, muted foreign portfolio investor inflows.
Foreign investors pulled out close to $18 billion from Indian equities in 2025. That capital outflow created sustained pressure on the rupee. Investors cited multiple reasons including earnings downgrades among Indian corporates, relatively limited exposure to the global AI-led growth cycle, and more attractive valuations in other emerging markets.

Second, weak export momentum.
India’s goods exports struggled amid sluggish global demand. While services exports, especially IT and business services, remained resilient, they were not strong enough to fully offset weakness in merchandise trade. That limited the natural dollar inflows that typically support the rupee.

Third, heightened hedging demand from importers.
With global uncertainties lingering, Indian importers increasingly rushed to hedge their dollar exposure. This surge in demand for dollars added to near-term pressure on the currency, particularly during periods of volatility.

Put together, these factors meant that even when global conditions turned supportive, the rupee did not benefit as much as its peers.

SBI’s 2026 Outlook: A Controlled Slide, Not a Collapse

Despite last year’s disappointment, SBI’s forecast for 2026 is far from alarmist.

The bank expects the rupee to decline by around 2%, with the exchange rate settling close to ₹92 per dollar over the next financial year. In other words, some depreciation is likely, but it is expected to be orderly and manageable, not disruptive.

What explains this relatively stable outlook?

According to SBI, several macro fundamentals are quietly working in the rupee’s favour.

A Contained Current Account Deficit

One of the biggest red flags for any currency is a ballooning current account deficit. That is not what India is facing right now.

SBI expects India’s current account deficit to remain below 1% of GDP in FY26. This is a crucial anchor for the rupee.

Two factors are doing the heavy lifting here.

Strong services exports, particularly IT, consulting, and financial services
Relatively low crude oil prices, which reduce the import bill for a country that depends heavily on energy imports

As long as the current account deficit stays contained, the risk of a sudden currency shock remains low.

Inflation Near RBI’s Comfort Zone

Another major support for the rupee is stable inflation.

SBI expects inflation to hover close to the Reserve Bank of India’s 4% target in 2026. That matters because runaway inflation often forces central banks into aggressive policy moves, unsettling currency markets in the process.

With inflation under control, the RBI has greater flexibility to manage liquidity and smooth volatility in the foreign exchange market without having to defend the rupee aggressively.

Global Tailwinds Could Help

The global backdrop also looks less hostile than it did a year ago.

SBI notes that the US Federal Reserve is nearing the end of its easing cycle. Historically, periods when the Fed pauses or winds down rate cuts have been supportive for emerging market currencies, including the rupee.

A more predictable US interest rate environment reduces sudden capital flows back into dollar assets and gives emerging markets breathing room.

At the same time, while the dollar may not weaken dramatically, it is unlikely to surge aggressively either. This removes one major source of pressure on the rupee.

The Rupee Is Undervalued and That Matters

One of the more interesting points in SBI’s report relates to the rupee’s real effective exchange rate.

The real effective exchange rate, which measures the rupee against a basket of currencies adjusted for inflation, has fallen about 5% below its estimated fair value. In simpler terms, the rupee is now cheaper than fundamentals suggest it should be.

This undervaluation has two important implications.

It boosts export competitiveness, making Indian goods and services more attractive globally
It limits downside risks, as excessively cheap currencies often attract stabilising capital inflows over time

While undervaluation alone does not guarantee a rebound, it does act as a cushion against sharp depreciation.

Capital Flows Could Turn Friendlier

Perhaps the biggest swing factor for the rupee in 2026 will be capital flows.

SBI highlights several developments that could improve sentiment.

Potential inclusion of Indian government bonds in global indices, which could attract long-term foreign investment
Stabilising corporate earnings, especially if domestic demand remains resilient
Renewed foreign portfolio equity inflows, particularly if India’s growth story regains relative appeal

Even modest improvements on these fronts could ease pressure on the rupee, offsetting part of the expected depreciation.

What This Means for Businesses and Investors

For businesses, especially importers, SBI’s outlook suggests continued but manageable currency risk. Hedging strategies will remain important, but panic-driven dollar buying may not be necessary.

Exporters, on the other hand, may benefit from a slightly weaker rupee, particularly in services sectors where margins are sensitive to exchange rates.

For investors, the message is clear. The rupee’s trajectory in 2026 is likely to be shaped more by fundamentals than fear. Sharp swings are unlikely unless there is a major global shock.

The Bottom Line

After a disappointing 2025, the rupee enters 2026 on steadier ground, but without the promise of a dramatic comeback.

SBI’s forecast of a 2% decline to around ₹92 per dollar reflects lingering challenges, especially on the capital flow front. Yet strong macro buffers such as a low current account deficit, stable inflation, undervaluation, and supportive global conditions suggest the currency is far from fragile.

In short, the rupee may continue to drift lower, but it is doing so with a safety net underneath.

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