The rupee’s sharp turnaround on Wednesday, following decisive intervention by the Reserve Bank of India, has refocused attention on whether the worst of the selloff is already priced in. According to SBI Research’s latest report, the currency is currently in what it calls “Phase III” of depreciation, a rare regime in which both the dollar and the rupee are weakening simultaneously, reflecting heightened geopolitical uncertainty rather than purely domestic stress.
SBI Research noted that rupee movements over the past two decades have broadly fallen into three phases. The current phase, which began around September 2024, is distinct because “both Dollar and Rupee are depreciating,” a pattern the brokerage linked to an unsettled global order marked by trade friction and elevated geopolitical risk. Since early December, the rupee has slid rapidly, falling from 90 to beyond 91 per dollar in just 13 days, the fastest such move on record on a scaled basis.
Signal 1: Geopolitics, not fundamentals, are driving the slide
The primary driver of the current weakness, SBI Research argued, is “unprecedented geopolitical uncertainties.” The brokerage pointed to a sharp spike in the Geopolitical Risk Index in April 2025, when the U.S. imposed a 50% tariff on India, as a key inflection point.Although the index has moderated since then, its average level between April and October 2025 remains well above its long-term norm, underscoring the persistent pressure on the rupee.
Signal 2: Portfolio inflow ‘largesse’ is gone
Another structural headwind is the sharp decline in portfolio inflows compared with earlier cycles. SBI Research showed that during CY07–CY14, net portfolio inflows averaged $162.8 billion, helping anchor the rupee. From CY15 to CY25 (till date), average inflows have fallen to $87.7 billion.
“The days of largesse flows is over,” the brokerage said, arguing that geopolitical uncertainty and delays around a U.S.-India trade deal have replaced capital abundance as the dominant force shaping the currency.
Signal 3: Tariffs are weighing disproportionately on the rupee
Since the announcement of sweeping U.S. tariff hikes in April 2025, the rupee has depreciated 5.7% against the dollar, more than any other major currency over the same period, according to SBI Research.
While the rupee has not been the most volatile, the brokerage said the magnitude of the move highlights how the continued 50% tariff on Indian exports has become a central drag in the current phase of weakness.
Signal 4: Dollar demand forced RBI’s hand
Prolonged uncertainty has also triggered “significant demand for $ in merchant segment,” SBI Research noted. Since July 2025, excess dollar demand, especially in the forward market, has surged, pushing combined spot and forward excess demand to an unprecedented $145 billion. This backdrop, the brokerage argued, “sought timely intervention.”
The central bank has stepped in intermittently to curb volatility. SBI Research estimated that the Reserve Bank of India intervened about $18 billion in the foreign-exchange market between June and September, with another roughly $10 billion in October.
Over the same period, foreign-exchange reserves fell by about $15 billion, underscoring the scale of the effort to smooth rupee moves rather than defend a specific level.
Signal 5: The depreciation regime has a shelf life
The most compelling case for a turnaround lies in SBI Research’s regime-based analysis of the exchange rate. Using a Markov-switching framework on monthly USD/INR data since mid-2021, the brokerage identified two distinct regimes, a stronger-rupee regime and a weaker, depreciating regime. The rupee is currently in the latter, with an estimated 84.2% probability of remaining there in the near term.
Crucially, however, SBI Research estimated the expected duration of this depreciation regime at about 6.3 months. “Therefore, we believe that the Rupee is likely to bounce back strongly in the second half of next fiscal,” the brokerage said.
Based on historical patterns, the brokerage sees a “most likely scenario” in which the rupee appreciates by at least 6.5% from current levels, potentially averaging around Rs 87 to the dollar in 2026, after a possible near-term overshoot toward Rs 92–92.5.
Shock absorber, but only up to a point
SBI Research also cautions against assuming that a weaker rupee will meaningfully fix India’s trade balance. While depreciation has boosted exports, as goods exports rose 19.4% year-on-year in November, empirical analysis by the brokerage showed that export and import responses to exchange-rate moves largely offset each other. As a result, the overall trade balance remains relatively insensitive to currency swings in the short run.
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For now, the rupee remains vulnerable to global risk sentiment and trade headlines. But if SBI Research’s regime analysis holds, the recent brush with record lows may ultimately mark not a new normal, but the late stage of a painful cycle, one that could give way to a recovery in the second half of the year ahead.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
