Therefore, there are 2 aspects to consider here: Expectations for overall Dollar movement and idiosyncratic considerations for the Rupee
There are complex geopolitical and macroeconomic considerations at play in 2026, which will determine the way the overall Dollar behaves.
1) The US labour market is weakening, but inflation is still high. The market is pricing 2 cuts of 25bps each by the Fed till the end of 2026. Inflation, however, continues to remain sticky and is not showing progress towards the Fed’s target. Trump is likely to announce the next Fed chair by the end of January. Most likely, there will be pressure on the next Fed Chair to steer rates lower and quickly. In our view market is underpricing this aspect. The US Treasury has to rollover its debt and, therefore, to keep its interest expense contained, low rates are desirable. There is also policy divergence between the Fed and other major central banks. ECB is likely to be on a long hold, and BoJ is hawkish. All of this is Dollar negative.
2) US protectionism, heavy-handed, unwarranted influence in global geopolitics, and the possibility of Fed independence being compromised could accelerate the De-Dollarization trend. This, too, is, therefore, Dollar negative but may take longer to play out.
3) There is, of course, the Supreme Court ruling on the legality of Trump tariffs. If the tariffs are deemed illegal, we may see the Dollar weaken. However, it may also, to some extent, reinstate faith in the US Dollar and decelerate the long-term De-Dollarization narrative
Overall, similar to 2025, we expect the Dollar to weaken in 2026.
The following are the idiosyncratic factors that would impact the Rupee:
1) US-India trade deal: This is by far the most important idiosyncratic factor. The more the timeline around this gets pushed, the more nervousness it will cause.
2) Ability of RBI to intervene: This was tested in the last quarter of 2026, and if the pressure on the Rupee continues, the RBI may have difficult choices to make. Keeping rates and liquidity growth supportive, follow-on effects of Rupee depreciation on foreign investments, and ammunition to intervene from a positioning standpoint, its own balance sheet considerations are all factors it will have to evaluate.
3) Indian equities too underperformed in 2025, and so far in January, we have seen FPI outflows. While one cause for underperformance was trade and tariff uncertainty, tepid domestic earnings growth and elevated valuations also played a part.
4) The government will likely continue with its commitment to fiscal consolidation but that has implications for growth. The headroom to spend will be limited by direct and indirect tax cuts. This would mean that monetary policy would have to be kept growth supportive to encourage private investment. This will keep the Rupee under pressure.
5) The possibility of Indian Bonds getting included in the Bloomberg aggregate index could be a positive for the Rupee.
Therefore, overall, we expect the Dollar to weaken and expect the Rupee underperformance to some extent amid a weak Dollar environment. The magnitude of underperformance is not likely to be as high as 2025, as overvaluation has been corrected, and we are now in fact in undervalued territory in REER terms.
(The author is Founder and CEO IFA Global)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
