Rupee at 88: 5 reasons the dollar rally may be short-lived

The Indian rupee’s recent fall past the 88-mark against the US dollar has caught attention, but much of the weakness reflects tariff-related sentiment rather than a deterioration in India’s economic fundamentals, YES Securities said in a note. 

With the RBI capping volatility through active spot and Non-Deliverable Forward (NDF) intervention, and global factors such as Fed easing expected to weaken the dollar further, the probability of dollar-rupee exchange rate sustaining above 88 appears low, YES Securities said. 

"Instead, stabilisation in the 86.5–88 band looks more plausible, barring a fresh escalation in tariff or geopolitical risks," the broking firm said.

The domestic brokerage pointed out five key reasons why the current scenario may be temporary.

First, the impact of tariffs on Indian exports, while significant, could be short-lived, YES Securities said. It noted that the doubling of US tariffs may trim $20–30 billion from shipments and shave off 40–50 basis points from real GDP growth. But with strategic ties between the two countries intact and negotiations ongoing, a rollback of secondary tariffs remains possible. This could help limit further downside for the rupee.

Second, YES Securities believes the rupee is fairly-valued  The real effective exchange rate (REER) stood at 100 in July, below its long-term average of 103.2. This suggests that the rupee is not structurally overvalued and may even be on the edge of undervaluation after August’s steeper fall against a basket of currencies. 

Much of the current slide is sentiment-driven rather than structural, YES Securities argued.

Third, expectations of Fed easing could provide a tailwind for the rupee, as per the brokerage. Weakening US labor market conditions and policy uncertainty have increased bets on multiple rate cuts over the next year. A likely Fed pivot and falling US yields would narrow India–US yield differentials, drawing foreign inflows into Indian bonds and equities and easing pressure on the currency, YES Securities said.

Fourth, India’s benign inflation profile supports stable real interest rates. CPI inflation for FY26 is expected at around 2.9 per cent, below the RBI’s 3.1 per cent forecast. This allows the central bank to consider a measured rate cut while keeping real rates near 1–1.25 per cent, cushioning the rupee from further sharp declines.

Finally, YES Securities believes that India’s macro fundamentals remain strong. Foreign exchange reserves are at a record $694 billion, and the current account deficit is expected to stay below 1 per cent of GDP. Robust services exports, a contained trade deficit, and steady domestic consumption provide a solid backdrop. With GST-driven growth and fiscal prudence in place, the economy is well-positioned to absorb external shocks, the broking firm said.

Taken together, YES Securities expectss the USD/INR is more likely to stabilise in the 86.5–88 band rather than sustaining levels above 88, unless fresh tariff or geopolitical risks emerge.