Against the backdrop of tariffs and foreign portfolio investor (FPI) exit worries, the Indian rupee fell below the 88 mark against the US dollar, fueling expectations that the Reserve Bank of India (RBI) would intervene to curb excessive volatility, a report said on Wednesday.
In its report, CareEdge Ratings reconfirmed its USD/INR prediction for FY26 end at 85–87 on account of weak dollar, strong yuan, manageable India current account deficit, and possible US–India free trade agreement.
"India’s forex reserves remain healthy at around $703 billion, near an all-time high, giving the RBI scope to intervene in the currency market and curb currency volatility if needed," the ratings agency suggested.
Analysts pointed out that short-term rupee pressure will continue due to US tariffs, increased H-1B visa fees, and ongoing FPI outflows.
CareEdge Ratings pointed out that the increased FPI selling during the current year may be due to fears that the 50 per cent tariffs are going to stay, and this would be a headwind for India's FY26 growth, which is expected to moderate to about 6 per cent.
Gross foreign direct investment (FDI) inflows amounted to approximately $25.2 billion in Q1 FY26, while net FDI fell to around $4.9 billion on account of higher outward investments made by Indian firms.
The report further added that the dollar index has declined about 10 per cent year-to-date, driven by uncertainty over US trade policy, fiscal concerns, and expectations of additional Federal Reserve rate cuts in the wake of the September reduction.
At the same time, the yuan has appreciated by about 2.5 per cent year-to-date, taking away a source of competitive pressure on the rupee that was noticed during the initial trade war in 2018–19.
"On the domestic front, we do not expect an RBI rate cut in the October MPC meeting. However, if high US tariffs persist, FY26 GDP growth could slow to around 6 per cent. This, coupled with potential downward pressure on inflation from GST rationalisation, may create room for further rate cuts later, likely another 25 bps," the report said.
The report also noted that since the US Federal Reserve is likely to make more forceful rate cuts than the RBI, the resulting interest rate gap could be beneficial for the rupee, providing some relief.
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