The Indian rupee concluded the year 2025 with its most significant annual loss in three years, depreciating by almost 5% against the US dollar. This performance marked its weakest showing since 2022, even as the dollar softened and many global currencies strengthened. However, analysts from the State Bank of India (SBI) project a more stable, albeit slightly weaker, trajectory for the currency in the coming financial year.
What Weighed Down the Rupee in 2025?
According to a detailed report by SBI Funds Management, the rupee's underperformance was driven by a confluence of domestic and global factors. Foreign Portfolio Investors (FPIs) were net sellers, withdrawing a substantial $18 billion from Indian equity markets. This exodus was attributed to concerns over corporate earnings downgrades, India's perceived limited exposure to the artificial intelligence-led global growth surge, and more attractive opportunities in other emerging markets.
Furthermore, the currency faced headwinds from sluggish export growth and increased hedging activities by importers seeking to lock in rates amid volatility. These elements collectively suppressed the rupee's value throughout the year.
SBI's Outlook for the Indian Rupee in 2026
Looking ahead, SBI anticipates the rupee to depreciate by approximately 2% in the next financial year, with the exchange rate stabilising around 92 against the US dollar. This forecast is notably less severe than the 2025 drop and is underpinned by several supportive macroeconomic conditions.
Domestically, India's current account deficit is expected to remain comfortably below 1% of GDP. This stability is bolstered by robust earnings from services exports and the benefit of relatively subdued global crude oil prices. Simultaneously, inflation is projected to hover close to the Reserve Bank of India's 4% target, minimising the risk of severe currency shocks from monetary policy divergence.
Global Tailwinds and Improved Competitiveness
The external environment is also set to play a favourable role. The US dollar is likely to find support as the Federal Reserve approaches the end of its interest rate easing cycle, a phase that historically benefits emerging market currencies. Importantly, the rupee's real effective exchange rate is now about 5% below its estimated fair value, enhancing India's export competitiveness and creating a buffer against sharp downward moves.
Capital flows could see a positive shift. The potential inclusion of Indian government bonds in global indices, a recovery in corporate earnings, and a return of foreign equity investments are all factors that may alleviate pressure on the rupee in 2026.
In summary, while the rupee endured a tough 2025, the foundation for a period of relative stability appears to be forming. A combination of prudent domestic economic management and a supportive global backdrop, as outlined by SBI, suggests the currency may navigate 2026 with reduced volatility and controlled depreciation.
