The recent trade agreement between India and the United States sparked optimism in financial markets, yet analysts caution that the Indian rupee is likely to continue weakening over the coming year as deeper macroeconomic pressures persist. Despite a sharp post-deal rebound, forecasts suggest the currency could depreciate to around 94 per dollar amid sustained foreign outflows and concerns over the country’s current account balance.
The rupee recorded its strongest single-day gain in seven years on Feb. 3 after Washington reduced steep tariffs on Indian imports from 50% to 18%, easing a major trade burden. The currency strengthened roughly 1.4% against the dollar alongside a rally in domestic equities, reflecting immediate investor relief. The surge followed a prolonged period of stress, during which the rupee underperformed many regional peers in 2025 and slid to a record low of 91.9 per dollar on Jan. 30.
Economists note that while the tariff cut removed a competitive disadvantage for India in accessing U.S. markets, it has not triggered the scale of capital return needed to sustain appreciation. Analysts at ANZ observed that foreign portfolio investors turned net buyers in February but have not returned in sufficient volume to create lasting upward pressure on the currency. In 2025 alone, overseas investors sold about $18 billion in Indian equities, citing high valuations, earnings pressures, and limited opportunities tied to artificial intelligence-led growth.
The rupee’s trajectory has contrasted sharply with currencies such as the Brazilian real, Swiss franc, and South African rand, which strengthened during the same period despite facing comparable U.S. tariff regimes. This divergence underscores how domestic structural factors, rather than trade policy alone, are shaping investor sentiment toward India.
External geopolitical risks are also clouding the outlook. Economists warn that evolving relations among major global powers could influence capital flows into emerging markets, adding uncertainty to India’s capital account. At the same time, projections from institutions including Goldman Sachs and MUFG indicate that India’s current account deficit may widen further, increasing downward pressure on the rupee.
Another factor weighing on the currency is the continued repatriation of profits by foreign investors. Multinational parents and venture capital funds have been withdrawing earnings from Indian operations following a record year for initial public offerings in 2025, when companies raised more than $19 billion. Firms such as LG Electronics benefited from listings that allowed overseas stakeholders to monetize their holdings, a trend expected to persist with upcoming IPOs from PhonePe, Oyo, and Zepto, alongside backing from global investors including Walmart and SoftBank.
India’s central bank is expected to play a stabilizing role by rebuilding foreign exchange reserves after heavy intervention last year. According to estimates by Nomura, the central bank sold a net $49.5 billion in reserves in 2025 to smooth volatility. As of the end of January this year, reserves stood at $723.8 billion. While the Reserve Bank of India does not officially target a specific exchange rate, it is known to step in periodically to counter speculative pressure by selling dollars.
Taken together, the developments suggest that while the trade détente delivered a short-term boost, the rupee remains tethered to broader structural challenges. Without a decisive revival in foreign investment and an improvement in external balances, analysts say the currency’s longer-term trend is still tilted toward depreciation.
