Rupee seen rebounding to 86/US dollar by end-2026, says BofA Securities

The Indian rupee, which hit a record low of 90.46 against the US dollar last week, is likely to regain ground and appreciate to 86 per dollar by end-2026, according to a new report by BofA Securities. The forecast comes despite the currency’s sharp 7% slide over the past year and its underperformance against to global peers.

BofA’s strategists said the rupee’s trajectory next year will largely hinge on portfolio flows, which turned negative in 2025 as equity investors exited Indian markets amid tariff-related uncertainties.

“Finalisation of the US–India trade deal to reduce tariffs will be key to restoring equity investor confidence,” the report noted. Stronger domestic growth momentum, supporting corporate earnings and easing valuation concerns, will also play an important role.

Against this backdrop, the RBI’s management of forex volatility is once again expected to be a stabilising force. While India’s FX reserves remain comfortable, BofA cautioned that persistent outflows could stretch RBI’s intervention capacity, particularly around its short dollar forward positions. Still, the global investment bank believes that expected dollar weakness in 2026, combined with India’s seasonally favourable first quarter, should support a “mild appreciation” in the rupee through next year.

The rupee’s weakness has been more pronounced in real effective exchange rate (REER) terms, with a 9% plus depreciation, raising concerns about its pass-through to broader economic variables.

BofA examined five key channels through which currency swings typically influence the Indian economy:

Growth: While India’s exports have become less sensitive to currency moves over time, a weaker rupee still tends to improve the trade balance. BofA expects this improvement to emerge in the coming months if weakness persists.

Large bout of weakness

The current episode marks one of the steepest phases of rupee depreciation in recent years. The currency is down 4.7% year-to-date in 2025, and 5.8% over the past year, while REER weakness is even more substantial at 8.6% YTD and 12.1% over one year. By comparison, earlier episodes saw depreciations of 8.7% in 2018, 14% in 2013, and 18.7% in 2008.

Despite the near-term drag, BofA argues that rupee weakness can be a long-term positive, influencing both consumer and producer behaviour and improving external competitiveness.