Rupee posts biggest annual decline in 14 years, tumbles 9.88 pc in FY26

The Indian rupee fell 9.88 per cent against the US dollar in FY26, its steepest annual drop in 14 years. The last comparable slide was in FY12, when the currency weakened 12.4 per cent amid a current account deficit of 4.2 per cent.

What drove the slide

The depreciation in FY26 was propelled by a convergence of external and domestic pressures:

• Persistent foreign portfolio outflows from equities and debt
• Elevated crude oil prices following geopolitical tensions in West Asia
• A stronger US dollar as global rates stayed higher for longer
• Volatility across global financial markets and tighter liquidity

Regional peers also lost ground against the greenback since April 1, with the Japanese yen down about 6 per cent, the Philippine peso by 5.74 per cent, and the South Korean won by 2.88 per cent.

How FY26 differs from FY12

Market participants described FY26 as a “perfect storm” of external shocks, capital outflows, and structural vulnerabilities distinct from FY12.

“Unlike FY12 (which was more domestic plus taper tantrum-led), FY26 depreciation is externally driven by oil, geopolitics, capital flight, and amplified by India’s import dependence,” said Sunal Sodhani, head of treasury at a leading foreign bank in India.

Sequence of pressure points

The initial leg of weakness in FY26 followed the imposition of US tariffs on India, which triggered a surge in dollar demand. The subsequent conflict in West Asia drove crude prices sharply higher, intensifying pressure on the rupee and weighing on risk sentiment. Domestic equities and debt faced sustained foreign selling through the year as investors reassessed exposure amid rising global yields and geopolitical uncertainty.

The rupee repeatedly marked fresh record lows, slipping to an all-time low of 95 against the US dollar despite the Reserve Bank of India’s interventions in the foreign exchange market.

RBI interventions and new curbs on speculation

To smooth volatility and support the currency, the RBI sold USD 55.073 billion in the spot market up to January in FY26. In a further step to curb excessive speculation, the central bank announced that banks can hold only up to USD 100 million in net open positions in the onshore currency market at the end of each trading day, effective April 10. The cap is intended to reduce the scope for large, one-sided bets against the rupee and improve market discipline.

The announcement led to a sharp appreciation in early trade the following Monday. However, much of those gains were later pared as oil marketing companies and other corporates stepped up dollar purchases.

Volatility stays elevated

On the day, the rupee briefly breached the psychological 95 level against the dollar before recovering to close 7 paise stronger at 94.78. Traders reported a wide 165 paise intraday swing in the USD/INR pair as the West Asia crisis entered its 31st day, keeping energy markets on edge.

“Rupee rose, but again fell due to some big corporate buying, squaring up of positions in the NDF market, nationalised banks buying and oil companies buying,” said Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP.

Outlook: wider range and higher volatility

Analysts expect the rupee to trade within a broader 92–97 range in the near term, with oil prices, capital flows, and global interest rates acting as key drivers. “Outlook depends on three variables: oil, flows, and global rates. The new normal is higher volatility plus gradual depreciation, not stability around a fixed band. In FY27, for the USD/INR pair, 92–97 remains the broader range play,” Sodhani said.

While the RBI’s measured interventions and tighter position limits aim to reduce speculative excesses, the currency’s trajectory will largely hinge on the evolution of geopolitical risks, the path of crude oil, and shifts in global monetary policy. A sustained improvement in portfolio and trade flows, alongside resilient domestic growth, would be crucial to temper depreciation pressures and stabilize the rupee over the coming quarters.