Forex matters: Will Rupee's fall below 88 against US dollar get worse?

With the Indian rupee near record low of 88.45/US dollar, investors are asking why and how far down the INR might go? Read this report to find out if the rupee will fall or rebound in months ahead

Rupee at record lows vs US dollar: The Indian rupee touched fresh record low levels on Thursday, hitting 88.45 per US dollar-mark. Despite the recent pressure, analysts at YES Securities see limited downside in the domestic currency from current levels.

 

In fact, they see room for a bounce back as the decline in August and September may have pushed the currency to 'oversold' zones.

 

"Indian rupee's slide past the 88-mark largely reflects US tariff-driven sentiment rather than a deterioration in India’s underlying fundamentals, suggesting limited room for further depreciation," the brokerage said, adding that the real effective exchange rate (REER) stood at 100.07 at the end of July 2025, which is well below its long-term average.

 

 

"This suggests the rupee is not structurally overvalued and may even be on the brink of undervaluation after August's steeper fall against the basket of currencies," YES Securities said.  The real effective exchange rate (REER) is the weighted average of a country's currency in relation to an index or basket of other major currencies.

 

Rupee at record low: A cause of concern?

YES Securities believes the recent weakness in Indian rupee is not a cause of concern as the economy’s macro buffers remain strong. The slide, it said, is "sentimental" rather than a reflection of the Indian economy’s fiscal position.

 

"With the Reserve Bank of India (RBI) capping volatility through active spot and non-deliverable forward (NDF) intervention, and global factors such as the US Fed easing expected to weaken the dollar further, the probability of USD/INR sustaining above 88 appears low. Instead, stabilisation in the 86.5–88 band looks more plausible, barring a fresh escalation in tariff or geopolitical risks," YES Securities said.   

Rupee outlook: Key reasons why Rupee may not fall further

The domestic currency began facing significant pressure after US President Donald Trump imposed additional tariffs on Indian imports (effective August 27, 2025) to penalise the nation for its trade barriers and purchases of Russian oil.

 

Forex traders began piling up dollars amid concerns that a hit on US exports, which stood at about $80 billion in FY25, could cut $20–30 billion from shipments, shaving 40–50 bps off India’s real gross domestic product (GDP) growth.

 

While this created immediate headwinds for the Indian rupee, the US-India strategic ties remain intact and negotiations between the two nations continue, making it plausible that secondary tariffs will eventually be rolled back to more sustainable/practical levels, analysts at the brokerage believe.

 

This, coupled with strong macro fundamentals, call for a rebound in rupee. Here's why:

 

REER signals fair valuation

The real effective exchange rate for rupee was 100.07 in July, much below the long-term average of 103.2. This suggests that the domestic currency is not "structurally overvalued".

 

Falling domestic inflation

The Reserve Bank of India (RBI) expects India’s CPI inflation to average at around 3.1 per cent in the current financial year (FY26). However, an eight-year retail inflation of 1.5 per cent in July 2025, may lead to a downward revision in projection.

 

Further, given the disinflationary impact of cuts in the goods and services tax (GST), which will filter through the economy during H2FY26, may create a favorable base effect lasting until H1FY27.

 

"We expect FY26 CPI to undershoot the RBI's projection by about 20 bps and forecast FY27 average CPI at around 4.2 per cent. Given this, and the ongoing tariff-related pressures, we anticipate the RBI to implement a 25-basis-point rate cut during the remainder of FY26," the brokerage said.

 

However, even after one additional 25 bps repo rate cut (following a cumulative 100 bps in CY2025), real interest rates are expected to remain around 1–1.25 per cent, providing continued support for currency stability, YES Securities said.

 

Resilient fundamentals

There are a host of factors supporting the government's strong fiscal position, despite tariff-related headwinds, that limit downside risks to the rupee.

 

For instance, robust services exports are expected to cushion the impact on tariff-hit merchandise exports to the US, keeping the current account deficit (CAD) comfortably below 1 per cent of GDP (estimated at 0.7 per cent). 

 

Secondly, the brokerage believes benign crude oil prices should further ease external pressures.

 

"Though sanctions-related risks on Russian crude imports, which currently total 1.7–2 mbpd at discounted rates, could raise India’s annual import bill by $3 billion, the impact on the rupee would remain limited relative to overall trade," it said.

 

Thirdly, rationalisation of GST rates may lift real GDP growth by 30 bps annually, with FY26 benefits confined to a 15-bps rise.  Additionally, India's foreign exchange reserves are at a record $694 billion, creating a sufficient buffer.

 

US Fed's dovish pivot

Tariff-driven trade policies, tighter immigration rules, and sweeping public sector layoffs under the Trump presidency are weighing heavily on the US jobs market. Given this, the markets are pricing-in five cuts over the next 12 months -- a sharp shift from earlier bets on just one or two.

 

"With the Fed expected to pivot and US 10-year yields likely to decline further, the yield differential between India and the US is set to widen. A combination of a weaker dollar and a higher India–US yield gap should attract foreign portfolio inflows into Indian bonds and equities, ease funding pressures, and give the rupee room to rebound," YES Securities noted.