Rupee tumbles 9.88% in FY26, worst annual fall in 14 years - what lies ahead?

The Indian rupee depreciated 9.88 per cent against the US dollar in FY26, marking its steepest annual decline in 14 years, according to market data as reported PTI.The last comparable fall was in FY12, when the domestic currency had dropped 12.4 per cent amid a widening current account deficit of 4.2 per cent.The sharp depreciation in FY26 was driven by persistent foreign fund outflows, elevated crude oil prices and a strengthening US dollar. Volatility in global financial markets and tightening liquidity conditions further added to the pressure on the currency.Other Asian currencies also weakened against the dollar during the period, with the Japanese yen declining 6 per cent, the Philippine peso falling 5.74 per cent, and the South Korean won slipping 2.88 per cent since April 1, according to market participants.Sunal Sodhani, head of treasury at Shinhan Bank India, described FY26 as a “perfect storm” of external shocks, capital outflows and structural vulnerabilities, noting that the drivers of the current depreciation differ from those seen in 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," PTI quoted Sodhani as saying.The initial weakness in the rupee was triggered after the US imposed tariffs on India, which led to a surge in demand for the dollar. The situation worsened with the escalation of the West Asia conflict, pushing crude oil prices higher and intensifying pressure on the domestic currency.The tariffs also weighed on equity and debt markets, resulting in sustained foreign capital outflows. The rupee has since touched successive record lows, breaching the psychological mark of 95 against the US dollar, despite interventions by the Reserve Bank of India (RBI).To support the currency, the RBI has sold $55.073 billion in the spot market till January in FY26.The central bank has also introduced regulatory measures to curb excessive speculation. On Friday, the RBI said banks can hold only up to $100 million in net open positions in the onshore currency market at the end of each trading day, effective April 10.The move briefly supported the rupee in early trade on Monday, though gains were later erased due to strong dollar demand from oil companies and corporates, traders said.The currency witnessed high volatility during the session, swinging 165 paise intra-day as the West Asia crisis entered its 31st day. It eventually closed 7 paise higher at 94.78 against the dollar after touching an intra-day low beyond 95."Rupee rose, but again fell due to some big corporate buying, squaring up of position in NDF, Nationalised banks buying and oil companies buying," said Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP.Market participants expect the rupee to remain volatile going ahead."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 added.