Indian rupee likely to face further pressure into 2026: MUFG

The Indian rupee is expected to remain under pressure through 2026, with risks tilted toward further weakness, according to a recent report by global financial group MUFG.

In a note released earlier this month, MUFG said it continues to expect the rupee to underperform amid persistent capital outflows, higher import demand and subdued foreign direct investment (FDI) inflows. The firm forecasts the currency to move beyond the 90 mark against the US dollar over time, targeting a level of around 90.80 by the September quarter of 2026.

“We have already been expecting INR to weaken and underperform, although FX outflow pressures have been more acute than anticipated so far,” the report said. MUFG also expects the rupee to weaken against major cross-currencies such as the euro, Japanese yen and Chinese yuan.

The rupee breached the psychologically important 90-per-dollar level in early December, extending a depreciation trend and hitting a fresh all-time low. MUFG attributes the pressure to a wider current account deficit, estimated at 1.5 per cent of GDP, along with soft net FDI flows. These factors, it said, are likely to outweigh any improvement in portfolio inflows.

The report assumes a trade agreement between India and the United States by early 2026, under which tariffs would be reduced to 25 per cent from the current 50 per cent. Such a deal could offer some support to capital flows, though MUFG cautioned that its currency forecasts are sensitive to tariff-related outcomes.

“If a trade deal between the US and India is not reached, the bias would tilt towards further INR weakness and more RBI rate cuts,” the report noted, adding that India’s domestic economy should still help cushion overall GDP growth.

Against this backdrop, MUFG expects the Reserve Bank of India (RBI) to continue intervening in currency markets to limit excessive volatility. However, it believes underlying fundamentals will eventually compel the central bank to allow the rupee to weaken beyond the 90 level over time.

Despite near-term risks, MUFG said it is not overly bearish on the rupee at current levels, citing cheaper foreign exchange valuations and renewed momentum in structural reforms. The report highlighted recent government measures such as GST simplification and labour code consolidation, arguing that these reforms could unlock longer-term growth potential.

“With reform momentum picking up and recent state election wins by the incumbent government, FX volatility is likely to remain relatively contained compared to past cycles,” MUFG said.

On the macroeconomic front, MUFG raised its GDP growth forecasts for India to 7.6 per cent for FY26 and 7.1 per cent for FY27. The upgrade reflects stronger domestic demand driven by GST tax cuts, improved rural activity and the assumption of a US-India trade deal by early 2026.

The report noted that the direct impact of tariffs on India’s exports has been limited so far, with exporters redirecting shipments to markets such as the European Union, China and the UAE. However, it warned that prolonged elevated tariffs could weigh more heavily on exports over time.

MUFG also said the lagged effects of easier monetary policy should provide additional support to domestic demand in 2026, helping offset some of the external pressures facing the Indian economy.