The Indian Rupee's challenging performance continued into 2025, marking its worst underperformance relative to the Asia Dollar index since 2013. According to Abhishek Goenka, Founder and CEO of IFA Global, the currency dynamics for 2026 present a complex picture with both Dollar weakness and Rupee-specific challenges expected to shape market movements.

Rupee's Current Position

The Rupee's recent performance has been particularly concerning, with key metrics highlighting the extent of its decline:

Dollar Weakness Expected in 2026

Goenka identifies several factors that could lead to Dollar weakness in 2026, despite complex geopolitical and macroeconomic considerations. The US economic landscape presents mixed signals with a weakening labor market alongside persistent inflation. Market expectations currently price in two 25 basis point cuts by the Federal Reserve through the end of 2026, though inflation remains sticky and shows limited progress toward the Fed's target.

The upcoming Fed chair announcement by Trump, expected by the end of January, could introduce additional pressure for lower rates. Goenka suggests the market may be underpricing this aspect, particularly given the US Treasury's need to rollover debt while containing interest expenses through lower rates.

Key Dollar-negative factors include:

• Policy divergence with other major central banks
• ECB likely to maintain long hold position
• Bank of Japan's hawkish stance
• Potential acceleration of de-dollarization trends
• US protectionism and geopolitical influence concerns

Rupee-Specific Challenges

While Dollar weakness may provide some relief, the Rupee faces several idiosyncratic factors that could limit its recovery:

Trade and Policy Uncertainties

The US-India trade deal timeline represents the most critical factor for Rupee performance. Any delays in finalizing this agreement could increase market nervousness and pressure the currency further.

RBI Intervention Capacity

The Reserve Bank of India's ability to intervene effectively was tested in the last quarter, and continued Rupee pressure may force difficult policy choices. The central bank must balance multiple considerations:

• Maintaining supportive rates and liquidity growth
• Managing foreign investment implications of Rupee depreciation
• Preserving intervention ammunition
• Addressing balance sheet considerations

Market Performance and Capital Flows

Indian equities underperformed significantly in 2025, with foreign portfolio investor outflows continuing into January 2026. While trade and tariff uncertainty contributed to this underperformance, tepid domestic earnings growth and elevated valuations also played significant roles.

Fiscal and Monetary Policy Dynamics

The government's commitment to fiscal consolidation, while positive for long-term stability, presents near-term growth implications. Limited spending headroom due to direct and indirect tax cuts means monetary policy must remain growth-supportive to encourage private investment, potentially keeping the Rupee under pressure.

However, one positive development could be the possible inclusion of Indian bonds in the Bloomberg aggregate index, which would provide support for the Rupee.

Market Outlook

Despite the challenging environment, Goenka expects Rupee underperformance to be less severe than 2025 levels. The correction from overvalued territory to current undervalued levels in REER terms provides some cushion against further significant declines. The combination of expected Dollar weakness and reduced magnitude of Rupee underperformance suggests a more balanced currency environment ahead, though vigilance regarding trade negotiations and policy developments remains essential.

The Indian rupee continued its downward trajectory, declining by 0.5% to reach 91.3838 against the US dollar in recent trading. This movement marks another step in the currency's ongoing weakness against the greenback.

Currency Performance Details

The rupee's decline of 0.5% brings the exchange rate to 91.3838 per dollar, representing continued pressure on the Indian currency. This level indicates the rupee's current position in the foreign exchange market.

Market Movement Context

The latest decline adds to the rupee's recent performance pattern, with the currency facing sustained pressure against the dollar. The 0.5% drop reflects the ongoing dynamics in the currency markets affecting the rupee's valuation.

This exchange rate movement comes as part of the broader currency market trends, with the rupee's performance being closely watched by market participants and policymakers alike.