The Indian rupee has faced considerable headwinds in 2025, succumbing to a roughly 4% depreciation against the US dollar. However, a recent report from Union Bank of India suggests the worst may be over, predicting limited further decline in the near term. This analysis comes amidst a complex interplay of domestic economic factors, global pressures like US tariffs, and fluctuating investor sentiment. Understanding the forces at play is crucial for businesses and investors navigating the Indian financial landscape.
Rupee’s Recent Performance and Contributing Factors
The Indian rupee’s slide to a record low near 89.4950 has been largely attributed to substantial Foreign Institutional Investor (FII) outflows exceeding USD 14 billion. This signifies a decrease in foreign investment in Indian markets, naturally weakening demand for the rupee. Adding to this pressure is the widening Current Account Deficit (CAD), indicating that India is importing more goods and services than it is exporting, further straining the rupee’s value.
The strength of the US dollar globally has also played a significant role. As the world’s reserve currency, a robust dollar typically leads to depreciation in other currencies, including the Indian rupee. Furthermore, delays in the first tranche of the India-US Bilateral Trade Agreement (BTA) have introduced uncertainty, impacting investor confidence.
Decoding the CAD and FII Impact
A larger CAD means India needs more dollars to finance its imports, increasing the supply of rupees in the foreign exchange market and thus lowering its value. FII outflows, conversely, reduce the demand for rupees as investors convert their holdings back into dollars. These two factors often work in tandem, creating a more pronounced downward pressure on the currency. The combination of these elements has created a challenging environment for the rupee throughout much of 2025.
Union Bank of India’s Outlook: Stability in Sight?
Despite the recent depreciation, Union Bank of India’s report offers a more optimistic outlook. The core argument centers around the fact that much of the anticipated weakening has already occurred. “Given that the rupee has already weakened by roughly 4 per cent this year, we do not expect significant further depreciation in the near term,” the report states.
This doesn’t mean the rupee is poised for a dramatic rebound, but rather a period of relative stability. The bank anticipates the currency will trade in a range-bound manner, specifically between Rs 88.80 and Rs 89.50, until the end of December. This forecast is based on a careful assessment of both the challenges and potential supporting factors.
Positive Influences on the Rupee
Several domestic factors are providing a buffer against further depreciation. Easing inflation is a key component, as it reduces the need for aggressive monetary policy tightening, which can sometimes attract foreign capital. Additionally, Goods and Services Tax (GST) related reforms are expected to boost economic activity and improve investor sentiment.
The report highlights the India-US BTA as a crucial catalyst. Finalizing the agreement is expected to significantly improve the rupee’s prospects. “With uncertainty around the agreement now a key driver for the rupee, we continue to expect that once the deal is finalised, the appreciation threshold for the currency should shift,” the report explains.
Potential Scenarios and Key Levels to Watch
While the base case scenario points towards range-bound trading, Union Bank of India identifies potential triggers for both appreciation and further depreciation of the Indian rupee.
Sustained inflows of domestic equity – meaning continued investment in Indian stock markets by local investors – combined with positive progress in India-US trade negotiations, could strengthen the rupee towards Rs 88.50 against the dollar. Rs 88.80/USD is identified as a key support level, meaning a price point where buying pressure is expected to overcome selling pressure.
On the flip side, any negative signals could lead to increased selling pressure, with strong resistance expected near Rs 89.50. A breach of this level could initiate a more rapid decline towards Rs 89.90. This emphasizes the importance of monitoring geopolitical developments and the broader tariff landscape, as these factors contribute heavily to market sentiment.
The Role of the RBI and US Federal Reserve
The report also points to the potential for a shift in the appreciation threshold should the India-US BTA be finalized in conjunction with a Reserve Bank of India (RBI) rate cut, a revival of FII inflows, and anticipated cuts to US Federal Reserve interest rates. Lower US interest rates would generally weaken the dollar, allowing the Indian rupee to strengthen. The RBI’s monetary policy decisions will also remain central to managing currency volatility.
Conclusion: A Period of Consolidation for the Rupee
The Indian rupee has undoubtedly experienced a challenging period, impacted by global economic pressures and domestic factors. However, Union Bank of India’s analysis suggests that the worst of the depreciation may be behind us. The expectation is for a period of consolidation, with the rupee likely to trade within a defined range of Rs 88.80 to Rs 89.50.
Ultimately, the future trajectory of the rupee will depend heavily on the finalization of the India-US BTA, the global economic environment, and the actions of both the RBI and the US Federal Reserve. Monitoring these developments closely is essential for anyone with exposure to the Indian currency market. For further insights into currency exchange rates and economic forecasts, consulting with financial experts and staying updated on market trends is highly recommended.
