Rupee recovery in a year? Why BofA has pegged INR at 86 per dollar

The Indian rupee could stage a meaningful recovery after a year of record lows, according to a new report by Bank of America Global Research. The brokerage expects the currency to appreciate to 86 per dollar by end-2026.

After a year of record lows, the Indian rupee may stage a recovery and strengthen to 86 per dollar by end-2026, according to a new report by Bank of America Global Research. The projection challenges the market narrative of prolonged weakness and signals a more constructive outlook based on global dollar trends and domestic stability.

BofA in its report said the recent slide in the rupee is driven by temporary distortions, not structural deterioration. “We believe USD weakness next year would still support mild INR appreciation, and that could pick up pace around the seasonally favourable first quarter,” it said. The brokerage expects the currency to firm to 86/USD by 2026, in line with global dollar softening.

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Sentiment impact

According to BofA Securities, any sharp move in the rupee—traditionally skewed towards weakness—affects both manufacturing and services sentiment, and raises perceptions of policy uncertainty.

Growth effect

While weaker currency levels continue to influence trade flows, BofA noted that the sensitivity of exports to the rupee has declined over time. Still, the trade balance maintains a strong inverse relationship and could improve in coming months if weakness persists.

Inflation outlook

Exchange rate passthrough to inflation has been falling but remains relevant. BofA estimates 7 bps inflation impact for every 1 per cent REER change. It expects the inflation effect in 2026 to be cushioned by low energy prices, though some intermediate goods may turn costlier.

External balances

BofA said a weaker rupee typically helps improve the current account, though the pending US-India trade deal introduces uncertainty. Services exports and remittances should support overall balance-of-payments stability.

Fiscal implications

Historically, a soft rupee marginally lifts government spending on subsidies like LPG and fertilizers. However, higher RBI intervention also boosts central bank dividends, making the fiscal impact mixed, the report said.

Capital flows remain key challenge

Capital flows have been the biggest pressure point, with FDI, FPI and debt inflows slowing through the year. The rupee remains dependent on portfolio flows in 2026 after sizeable equity outflows triggered partly by tariffs. A finalised trade deal that reduces tariffs and a stronger growth cycle would help restore investor confidence, BofA added.

Sector impact

A weaker rupee typically benefits export-oriented sectors such as IT and pharma, as dollar revenues lift earnings. But continued depreciation can make foreign investors cautious, said Ravi Singh, Chief Research Officer at Master Capital Services.

“RBI’s calibrated intervention can help stabilise sentiment. For now, equity investors should expect sector-specific divergence rather than broad disruption, with currency-sensitive pockets driving short-term rotation,” he said.

US Dollar vs Rupee today

The Indian rupee traded lower on Tuesday amid firm dollar demand and cautious risk sentiment in global markets.

The currency slipped to Rs 89.93 per dollar, down 0.23 per cent or 20 paise from the previous close.