UBS Forecasts Continued Rupee Pressure with Dollar-Rupee Target at 94
UBS forecasts the dollar-rupee rate at 94 for the coming year, citing weak capital flows at decade-low levels, widening current account gap, and recovering US dollar as key pressures on the Indian currency. While RBI intervention has prevented sharper declines and a potential trade deal could temporarily push the rupee to 88-89 range, underlying macro factors including limited FDI and weak capital inflows continue to weigh on the currency, with UBS viewing any trade deal support as temporary.
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UBS Global Research expects the Indian rupee to face continued pressure in the coming year, with the investment bank setting a dollar-rupee target of 94 amid multiple headwinds affecting the currency.
Key Factors Weighing on Rupee
Rohit Arora, Head of Asia FX and Rates Strategy at UBS Global Research, identified several factors contributing to the rupee's challenges. The currency has underperformed its peers due to weak domestic demand, tariff-related concerns, and foreign exchange reserve accumulation by the Reserve Bank of India. Capital flows are currently running at their lowest levels in over a decade, making them a key driver of rupee movement.
| Challenge: | Impact |
|---|---|
| Capital Flows: | Running at decade-low levels |
| Current Account: | Widening gap |
| FDI Flows: | Limited inflows |
| US Dollar: | Expected gradual recovery |
Arora noted that strong intervention by the RBI has prevented a sharper fall in the currency. The central bank's active management approach has helped cushion the rupee's decline, though underlying pressures persist.
UBS Outlook and Scenarios
The investment bank has pegged the dollar-rupee rate at 94 for the coming year, based on expectations of a gradually recovering US dollar. Arora explained that the rupee has "missed that window of broad dollar decline," with UBS expecting dollar strength to return from the current quarter.
While a potential trade deal could provide near-term support for the rupee, UBS views such support as likely temporary and insufficient to change the broader downward trend. In a scenario where a trade deal materializes unexpectedly, the rupee could rebound to the 88-89 range, though gains beyond that level may be limited.
| Scenario: | Dollar-Rupee Level |
|---|---|
| Baseline Forecast: | 94.00 |
| Best Case (Trade Deal): | 88-89 range |
| Weak Scenario: | Beyond 95.00 |
RBI's Approach and Currency Management
The RBI has indicated comfort with a 3-4% annual depreciation, particularly given the current environment of low inflation and uneven growth recovery. Arora noted that the rupee is being used as a "shock absorber," especially if tariff pressures persist. Low inflation provides policymakers room to allow currency flexibility without significant spillover effects into equity markets.
Large foreign exchange forward maturities and the central bank's active currency management are expected to cap any potential appreciation. The "historical trend of higher highs and higher lows" in the dollar-rupee trajectory since 2019 is likely to remain intact, according to UBS.
Comparative Currency Positioning
Arora cautioned against viewing the rupee as undervalued despite its recent decline, noting that on an inflation-adjusted basis, the currency remains relatively elevated compared with the Chinese renminbi. UBS maintains a more positive outlook on the Chinese renminbi, citing better external balances and support from Chinese equities.
Looking ahead to 2026, UBS expects the rupee may not experience the same degree of underperformance as in the current year but could still lag some regional peers. The investment bank's analysis suggests that while the worst of the rupee's decline may be behind it, significant recovery remains unlikely without substantial improvements in underlying fundamentals.
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