Even As Dollar Softens, MUFG Sees Rupee Strain From CAD, FDI Headwinds

Rupee Seen Weakening Beyond 90 Into 2026

The Indian rupee is expected to remain under pressure and weaken further into 2026, according to a report by global financial group MUFG. The firm forecasts the currency to move beyond the psychologically important 90-per-dollar level, targeting around 90.80 against the US dollar by the September 2026 quarter. MUFG noted that while rupee underperformance was anticipated, foreign exchange outflow pressures have been sharper than expected.

Import Demand, CAD And FDI Pressures Weigh On INR

Several structural factors are weighing on the Indian currency, including higher import demand, a wider current account deficit estimated at 1.5% of GDP, and subdued net foreign direct investment inflows. These pressures are expected to outweigh any improvement in portfolio inflows. The rupee breached the 90 mark against the dollar in early December, extending its depreciation streak and touching a fresh all-time low.

RBI Intervention Likely, But Gradual Weakening Expected

MUFG expects the Reserve Bank of India to continue intervening in the foreign exchange market to curb excessive volatility. However, the report suggests that underlying fundamentals will eventually push the central bank to allow the rupee to weaken further over time. Risks remain tilted toward additional depreciation, particularly if global conditions or trade negotiations turn adverse.

US–India Trade Deal A Key Variable

A central assumption in MUFG’s outlook is a US–India trade deal by early 2026, which would reduce tariffs to 25% from the current 50%. Failure to secure such an agreement could lead to further rupee weakness and potentially prompt additional RBI rate cuts. Despite near-term risks, MUFG said it is not overly bearish on the rupee, pointing to attractive FX valuations, reform momentum, and political stability.

Dollar Weakens As Fed Rate-Cut Bets Grow

Global currency trends are also influencing the rupee. The Bloomberg Dollar Spot Index posted its worst weekly decline since June, falling about 0.8% during the week and nearly 8% so far this year, marking its steepest annual drop since 2017. The greenback’s weakness has coincided with a decline in US Treasury yields, with the 10-year yield easing to around 4.13%.

US Data And Holiday Trading Drive FX Moves

Recent US data showed unemployment rising to its highest level since 2021, while inflation readings came in below expectations, reinforcing market expectations of two Federal Reserve rate cuts by mid-to-late 2026. Thin holiday liquidity has amplified currency moves, benefiting risk-sensitive currencies such as the Australian dollar and Norwegian krone.

India Growth Outlook Remains Strong

Against this backdrop, MUFG raised India’s GDP growth forecast to 7.6% for FY26 and 7.1% for FY27, supported by stronger domestic demand, rural recovery, GST tax cuts, and the lagged impact of easier monetary policy, even as external risks continue to linger.

(With Inputs From ANI And BLOOMBERGE)

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