Rupee at record lows: 5 implications of depreciating Indian currency; BofA sees rebound

Rupee at record lows: Indian currency (INR) has been on a free-fall lately, with the local currency depreciating over 7 per cent in the current calendar against US dollar. The fall in the Indian currency has made it one of the worst performing currencies in the Asian and emerging markets, with a real effective exchange rate signaling a 9 per cent depreciation, said BofA Securities.

This weakness, which may persist in the near term given the latent uncertainty of the US India trade deal, and pressure on capital flows, can and will impact various macroeconomic variables in India, if it persists, noted the global brokerage firm, which has pointed out 5 major implications of this weakness, which may have short-term turbulence, but may be positive in long-term.

Sentiment – The immediate impact of a sharp change in the value of the rupee, which historically has been towards weakness, impacts both manufacturing and services sentiment, and raises policy uncertainty perception, said BofA Securities.

Growth – The traditional channels of impact on imports and exports from a weaker rupee persists, but the coefficients are weakening over time, as India’s exports are less sensitive to the rupee. Still, trade balance does exhibit a strong inverse relation to the rupee, and should improve in next few months if rupee weakness persists, it said.

Inflation – Exchange rate passthrough from rupee fluctuations to inflation, both wholesale and retail, has been steadily declining, but still is estimated to be 7 bps for every 1 per cent REER change, it said. "We believe impact of rupee weakness in 2026 will be blunted by low energy input prices, but other intermediate goods can potentially become more expensive at the margin."

External balances – "Given the relatively high impact of rupee weakness on trade balance, we would expect current account to respond positively, but the uncertainty of US India trade deal can blunt the impact. Both services trade and remittances should also improve at the margin, and this anchors the current account funding requirements remaining manageable in 2026," BofA notes.

Fiscal finances – While not an immediate source of impact, historically, weaker rupee can have marginal effects on subsidy payouts, especially for cooking gas, fertilizers and defense requirements. However, the intervention by RBI to stabilize the rupee will also positively affect its dividend payouts, so the net effect of rupee weakness on fiscal finances is unclear, BofA adds.

The primary challenge has been on capital flows, and that has been an issue which remains multifaceted, and has been seen across FDI flows, FPI flows, and debt related inflows, which have to a certain extent stalled. INR still remains dependent on portfolio flows next year after large equity outflows this year partly driven by tariffs, said BofA.

"Overall, we believe US dollar weakness next year would still support mild INR appreciation and that could pick-up pace around seasonally favorable 1Q for INR. We forecast INR to reach 86/USD by end-2026, in line with US dollar weakness next year," it added.

Finalization of trade deal to reduce the tariffs would be important in reducing uncertainty for equity investors. Further pick-up in growth momentum would be another key factor for next year which may support corporate earnings and ease equity valuation concerns.

The rupee depreciated 10 paise to 90.15 against the US dollar in early trade on Tuesday as dollar demand from corporates, importers and foreign portfolio investors dented investors' sentiments. Meanwhile, the dollar index has also remained below 100-mark lately.

A weaker currency typically benefits export-oriented sectors such as IT, pharma, etc where dollar revenue translation lifts earnings. However, a weaker currency often makes foreign investors more cautious, as continued depreciation lower returns when funds are repatriated, said Ravi Singh, Chief Research Officer at Master Capital Services

"Markets will closely watch RBI’s stance; even calibrated intervention can stabilise sentiment. For now, equity investors should expect sector-specific divergence rather than broad-based disruption, with currency-sensitive pockets driving short-term rotation," he said.