Rupee slide: SBI Research sees depreciation lasting 6 more months, recovery to 87 mark in 2026

The Indian rupee’s rapid slide to successive record lows in recent weeks has analysts debating how much the currency can depreciate further. In its latest report titled “In Rupee We TRUST!”, SBI Research said the Indian currency is currently passing through what it describes as Phase III of depreciation, a period marked by simultaneous weakness in both the rupee and the US dollar. Unlike earlier cycles, this phase is driven less by domestic macroeconomic stress and more by heightened global uncertainty, particularly geopolitical tensions and trade disruptions.

The report said using a Markov regime-switching model, SBI Research estimates the rupee will remain in the depreciating regime for about six months, after which it could appreciate by around 6.5%, potentially moving back towards Rs 87 per dollar in 2026.

The Indian rupee breached the 91-per-dollar mark on Tuesday to hit an all-time low, before staging a sharp rebound the following day. On Wednesday, the currency was trading at 90.3475 per US dollar, recovering from its previous close of 91.0275. Strong intervention by the Reserve Bank of India (RBI) triggered the rupee’s strongest intraday recovery in seven months on December 17, snapping a prolonged spell of weakness against the US dollar.

The domestic currency surged in early trade after sustained dollar selling by state-owned banks, widely perceived to be acting on behalf of the central bank. This intervention helped curb volatility and restore stability to market sentiment. In percentage terms, the rupee gained 1.03%, its biggest single-day rise since May 23, 2025, when it had appreciated 1.05%.

Why the rupee is falling

According to the analysis, the biggest structural change affecting the rupee is the sharp decline in foreign portfolio inflows compared with the pre-2014 period. Between 2007 and 2014, net portfolio inflows averaged $162.8 billion annually, providing strong support to the currency. However, from 2015 to 2025, average inflows have dropped to $87.7 billion, reducing the cushion that once absorbed global shocks. In 2025 alone, foreign portfolio investor (FPI) outflows crossed the $10 billion mark, exerting sustained pressure on the rupee, particularly through equity markets.

Geopolitical developments remain the most significant driver of recent currency movements. SBI Research noted a sharp spike in the geopolitical risk index in April 2025 after the US imposed a 50% tariff on Indian exports. Since the tariff announcement, the rupee has depreciated by nearly 5.7% against the dollar, the steepest fall among major global currencies during this period. While the geopolitical risk index has moderated since then, it remains well above its long-term average, indicating persistent pressure on the currency.

Demand for dollars

The report also highlights rising demand for dollars in the merchant segment of the foreign exchange market. Since July 2025, excess demand in the forward market has increased sharply as importers and exporters stepped up hedging amid uncertainty. Combined excess demand in the merchant market touched an unprecedented $145 billion, prompting intervention by the Reserve Bank of India (RBI).

The report also notes unprecedented excess demand for dollars in the merchant segment of the forex market, particularly in forward contracts, reflecting hedging behaviour amid uncertainty. Combined excess demand touched $145 billion, prompting intermittent intervention by the Reserve Bank of India (RBI). The RBI is estimated to have sold nearly $30 billion in the forex market between June and October 2025 to curb excessive volatility, even as foreign exchange reserves declined modestly.

Rupee at 87 in 2026?

Despite near-term weakness, SBI Research remains constructive on the medium-term outlook. Its Markov-switching analysis suggests the rupee is likely to exit the current depreciation regime after about six months. Historical patterns indicate that once such a transition occurs, the currency tends to recover meaningfully. Based on this, the report projects a potential appreciation of around 6.5% in 2026, taking the rupee closer to the ₹87-per-dollar level, assuming geopolitical risks ease and capital flows stabilise.