Analysts at UBS Investment Bank have delivered a sobering long-term forecast for the Indian rupee, projecting a sustained depreciation that could see it slide to 94 against the US dollar by the financial year 2026-27 (FY27). This outlook suggests that temporary respites, such as easing global trade tensions, will be overwhelmed by deeper structural challenges facing the economy.
Key Drivers: RBI's FX Strategy and Capital Flight
The Swiss bank's analysis points to a confluence of persistent headwinds. A primary factor is the Reserve Bank of India's (RBI) approach to managing the country's foreign exchange reserves. According to Rohit Arora, Head of Asia FX & Rates Strategy at UBS, the central bank is likely to actively replenish its reserves whenever the rupee stabilizes or capital flows return.
"The reason why we think pressure will come back is because of RBI's loss of FX reserves over the last few months," Arora stated in a recent media interaction. This implies that dollar purchases by the RBI to rebuild its "war chest" will effectively cap any sustained appreciation of the Indian currency.
Capital flows remain a central concern. UBS attributes recent outflows more to India's growth dynamics and high market valuations than to external factors like tariffs. Arora highlighted that while India's real GDP growth is robust, nominal GDP growth has been "extremely weak," which dampens corporate earnings and equity returns. Furthermore, elevated stock valuations and India's limited involvement in the global artificial intelligence boom have kept foreign equity investments subdued, with net foreign direct investment (FDI) at multi-year lows.
Limited Rebound and Competitiveness Concerns
UBS analysts are skeptical of any significant recovery for the rupee. They argue that even if a favorable global trade deal provides a window for rebound, the upside is severely limited. "Any rebound in rupee because of a trade deal would be one, limited towards 88 to 89 at best," Arora clarified.
The bank also countered the notion that the rupee has become cheap after its recent decline. In 2025, the currency depreciated by over 6%, hitting a record low of 91.07 against the dollar on 18 December. Despite the Real Effective Exchange Rate (REER) falling to a 10-year low, UBS does not consider the rupee fundamentally cheap. This view is supported by India's core goods trade balance, which remains stuck in a weak multi-year range, indicating underlying competitiveness issues.
UBS framed this trend as a long-term structural shift, not a temporary shock. Arora referenced RBI Governor's recent comments, noting that an annual depreciation of 3-4% is considered "broadly normal." He added, "This pair, which has been making higher highs, higher lows since 2019 because of competitiveness, I think it will continue to make higher highs, higher lows."
Near-Term Targets and Global Context
In the nearer term, UBS expects the rupee to weaken to 92 against the dollar by the end of the current financial year (FY25), before its projected slide continues. The bank sees potential support from bond inflows due to rising yields, but believes it won't be sufficient to dramatically reverse the balance of payments situation.
Globally, UBS holds a contrarian view, forecasting a moderately stronger US dollar while its peers bet on dollar weakness. The bank is constructive on the Chinese renminbi for the medium term, expecting gradual appreciation. In stark contrast, it is bearish on the Japanese yen, forecasting the dollar-yen pair to weaken toward the high 150s due to negative real interest rates and capital outflows.
For India, the path ahead for the rupee appears set against these strong global and domestic currents, with structural factors poised to dictate a gradual but persistent depreciation trend over the coming years.
