Rupee projected to trade in range of 85.5-87.5 per dollar in FY26

New Delhi : The performance of Indian rupee in FY25, when compared with other global currencies, was relatively stable, with a stronger dollar weighing on all major currency pairs, a report showed on Wednesday.

However, towards the end of the year, a reversal in dollar strength and FPI inflows into debt supported a rally in rupee, with the domestic currency recouping as much as 2.4 per cent in a single-month alone, according to a report by Bank of Baroda (BoB).

The coming year is likely to be marked by a period of volatility, awaiting clarity on US tariff policies. This will also set the stage for the US Fed’s rate actions, in turn, affecting how the dollar behaves.

"On the domestic front, the rupee is likely to find support from improvement in growth prospects, lower inflation and stable external deficits. Overall, we expect the rupee to trade in the range of 85.5-87.5 per dollar in FY26," said Aditi Gupta, Economist, Bank of Baroda.

FY25 was an interesting year for the rupee as it underwent periods of stability, rapid depreciation and consolidation thereafter.

While the first 7 months of the year were marked by a largely rangebound currency, the latter part of the year was characterised by wide fluctuations in the rupee movement.

The results of the US presidential elections in November were a key catalyst for the global forex market as a win for Donald Trump cast a shadow of uncertainty over US growth and inflation dynamics. This led to a significant repricing of Fed rate cut expectations, which, in turn, boosted the demand for the dollar.

"The rupee’s fortune also varied in turn. Between March to October, it depreciated by just 0.8 per cent, with average daily annualised volatility at multi-year lows of just 1.5 per cent," said Gupta.

While strong domestic fundamentals underlined a period of stability in the currency in the first part of the year, changing global landscape played an important role in the domestic currency’s performance in the latter part of the year.

Going ahead, the US tariff stance will play a critical role in the movement of global currencies.

"After some upheaval, markets have largely taken US tariff actions in stride, however, the balance will once again be tested," the report mentioned.

On the domestic side, conditions remain favourable for the rupee, which should lend support to the domestic currency amid mounting external challenges.