The Indian rupee has fallen to a record low against the US dollar, despite the dollar index dropping to its lowest level in two months. This decline is largely due to concerns over the lack of a trade deal between India and the US, as well as significant foreign investor outflows.
The rupee reached an intraday low of 90.56 against the US dollar on December 12, marking a 24-paise fall from its previous close. It eventually closed at 90.49, down 17 paise. Meanwhile, foreign portfolio investors (FPIs) have continued to sell, with outflows reaching ₹17,955 crore in December alone and ₹161,630 crore for the year, according to NSDL data.
India and the US recently concluded two days of trade talks, exchanging views on trade-related issues, including negotiations for a mutually beneficial bilateral trade agreement. Prime Minister Narendra Modi and US President Donald Trump also discussed ways to sustain momentum in their bilateral economic partnership, sparking hopes of a potential trade deal.
However, the absence of a clear announcement has created uncertainty, affecting the rupee's value. Analysts believe that a trade deal could lead to a meaningful correction in the USDINR as clarity on tariff lines, supply-chain alignment, and export competitiveness improves.
Analysts at BofA expect the Indian rupee to remain dependent on portfolio flows, partly driven by tariffs. The finalization of a trade deal, which is expected to reduce tariffs, would be crucial in reducing uncertainty for equity investors. A pick-up in growth momentum would also support corporate earnings and ease equity valuation concerns.
However, the lack of a clear outcome from the trade talks poses the risk of the deal either remaining elusive or missing expectations. In such a scenario, a weak deal could reinforce market concerns around prolonged tariff exposure and may extend the current foreign investor exit.
Against the current backdrop, the near-term trend is expected to remain skewed toward further weakness. The central bank has intervened only to smooth volatility, not to defend any specific level. If global risk appetite stabilizes and the trade talks deliver a positive surprise, the rupee could retrace toward 89.80–89.60. However, in the absence of a clear catalyst, the pair is more likely to test the recent peak near 90.80, with scope to extend toward 91.50-92.00 over the coming weeks.
Meanwhile, BofA forecasts the rupee to reach 86/USD by end-2026, in line with USD weakness next year. This outlook is based on the expectation of a mild appreciation in the rupee, driven by USD weakness and improved market trends.
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