Budget Pressures Mount as Rupee Trades Near ₹92 Mark

In recent trade, the Indian rupee came very close to ₹92 against the U.S. dollar, and analysts were actively pricing in the risk of the value falling further after the Union Budget 2026-27.

The weakness of the currency is an indication of both domestic and global factors, which include the continued outflow of foreign capital, the absence of major fiscal policies aimed at attracting foreign investment and the continued robustness of the U.S. dollar.

The market participants said that the drop in the rupee has taken place despite resilience in the benchmark economic indicators of India, and this is due to external influence on the direction of the currency.

Rupee’s Recent Moves and Record Low Levels

The Indian rupee has been trading at historic weak levels, with the currency slipping to around ₹91.99 per U.S. dollar, close to the psychologically significant ₹92 mark in recent sessions.

In January, the currency fell 2.3%, marking its worst monthly performance since September 2022. During the month, the rupee touched a record low of 91.9875 per dollar before ending January near 91.98, as foreign selling and consistent demand for dollars kept sentiment weak.

Foreign Outflows Intensify Pressure

A major drag on the rupee has been sustained foreign portfolio investor (FPI) outflows. Foreign investors sold about $4 billion worth of Indian equities in January, adding to nearly $19 billion of net equity outflows in 2025.

Market participants said foreign selling has been driven by global risk-off sentiment, higher yields in developed markets, and concerns around currency depreciation, all of which have reduced the appeal of Indian assets for overseas investors.

Budget Signals, Policy Gaps and Analyst Expectations

Market participants said the Budget has reinforced an “India-first” policy bias in the near term, which may not immediately resonate with overseas investors who are already weighing currency risks, taxation and transaction costs. As a result, expectations of a sustained recovery in foreign capital flows remain muted.

Several analysts believe the absence of direct measures aimed at reviving foreign participation could keep the rupee under pressure. Some estimate the currency could weaken further from current levels unless there is a meaningful turnaround in capital inflows or global conditions improve.

Shashank Udupa, a Sebi-registered research analyst and fund manager at Smallcase, said the Budget has not provided sufficient incentives to draw foreign capital back into Indian markets. He expects the rupee to decline by another 2–3%, citing limited appeal for overseas investors under the current policy framework.

Udupa added that currency pressures could intensify if the global environment turns more challenging for emerging markets. In particular, expectations of a strong-dollar stance under a new U.S. Federal Reserve leadership could amplify pressure on emerging market currencies, including the rupee. He said meaningful stabilisation would likely require targeted steps to revive foreign institutional flows or attract large-scale foreign direct investment.

Capital Gains Taxes and STT Add to FPI Disappointment

Other analysts echoed concerns around investor disappointment on the tax front. Anuj Choudhary, research analyst at Mirae Asset Sharekhan, said foreign investors had hoped for relief in capital gains taxation, but the absence of any changes has added to negative sentiment.

Choudhary noted that the recent increase in securities transaction tax on futures and options has further raised trading costs for overseas participants, particularly arbitrageurs and derivative-focused funds. Higher costs, he said, erode post-tax returns and reduce India’s relative attractiveness compared with other emerging markets, potentially extending the period of foreign outflows.

Despite near-term challenges, some stabilising elements may gradually come into play. Choudhary said sector-specific incentives and tax holidays announced in the Budget could help support foreign direct investment over time, even if portfolio flows remain weak initially.

He added that easing global commodity prices could also help moderate pressure on the rupee, improving the external balance over time. In the near term, however, he expects the currency to remain volatile and trade within a broad 90–94 range, reflecting ongoing uncertainty around global rates, capital flows and investor sentiment.

External Risks and RBI’s Approach

Analysts also pointed out that concerns flagged earlier in the Economic Survey, including volatile capital flows and global financial tightening, are now becoming more visible in currency markets.

Akshat Garg, Head of Research and Product at Choice Wealth, said sustained dollar strength, elevated U.S. bond yields and ongoing foreign outflows have kept emerging market currencies under strain. The rupee, he noted, is facing additional pressure from import-related dollar demand and precautionary hedging by corporates.

While the Reserve Bank of India has sufficient foreign exchange reserves to manage excessive volatility, Garg said the central bank appears focused on smoothing sharp moves rather than defending a specific exchange rate level, unless market conditions deteriorate sharply

What Does This Mean for Investors?

On a medium-term basis, analysts are not too pessimistic but are also cautious. The economic growth perspective of India is rather stable; inflation has been kept down, and the fiscal policy remains focused on capital expenditure. Nevertheless, the short-term currency fluctuations are likely to be highly correlated with the world monetary policy indicators, dollar value and stance of international capital flows.

A weak rupee may be both positive and negative for the investors and other players in the market. On the one hand, the weaker currency would favour the export-based industries by making the Indian products more competitive in the global market. Conversely, it may cause the price of imports such as crude oil and other basic commodities to rise, which could spill over to the inflationary forces and impact the profitability of corporations.

Constant rupee weakness can also affect portfolio allocations, with the foreign investors considering currency risk along with equity and debt returns. Without new policy actions to decrease outflows or increase inflows, analysts opine that the currency markets could continue to be volatile and susceptible to macroeconomic events and trends in the world and the policies of the Federal Reserve and external trade.

Sources

Economic Times