Economists at Standard Chartered and Deutsche Bank project the rupee to decline to Rs 87 against the US dollar by March 2025. Analysts, however, said this could be achieved even sooner as the Reserve Bank of India (RBI) eases its foreign exchange intervention strategy or if global trade tensions escalate further.

Anubhuti Sahay, the head of India Economic Research at Standard Chartered Bank, mentioned that rupee has weakened at a fast pace. The US dollar is the reason for such a 1.6% fall since November 2024. She observed that such a depreciation usually occurs over several months, not within one month. The rupee, which fell 0.47% in April-September 2024, has since slipped sharper by 2.21%. On Monday, it crossed the Rs 86.50/USD mark, making it the worst performing major currency worldwide.

Economists attribute the weakness to several factors, such as the strength of the US dollar, due to economic outperformance, threats of tariffs, and narrowing interest rate differentials with emerging markets. Despite these pressures, the RBI’s active foreign exchange management has helped the rupee perform better than most other Asian currencies. However, this intervention has significantly strained liquidity. Nomura estimates show that liquidity fell from Rs 4.6 lakh crore at the end of September to just Rs 40,000 crore by December, with $120 billion worth of interventions recorded in the December quarter alone, as per Emkay Global.

Kaushik Das, chief economist for India and South Asia at Deutsche Bank, said the current account deficit of less than 1.5 percent of GDP is still manageable, but the volatility in capital flows is bound to continue having an adverse effect on the rupee value. Moreover, he said the RBI may not stop further depreciation of the currency, but the move may have a dampening impact on growth prospects for 2025 onward.

Analysts' forecasts compiled suggest that the rupee may trade between Rs 86.25 and Rs 88.00/USD by March 2025, with some predictions suggesting it may settle within the range of Rs 87.00-Rs 87.75 by the end of December 2025.

Madhavi Arora, lead economist at Emkay Global, said policy intent remains on ensuring the rupee does not become an outlier among emerging market currencies, even amid disproportionate pressures. She added that the interplay of US tariffs, China's economic strategies, and the Federal Reserve's monetary policies will determine the rupee's trajectory, with the RBI likely to adopt a more cautious approach to defending the currency.

Economists expect the rupee to exhibit more two-way movements in 2025 compared to recent years. While the RBI’s tolerance for a weaker rupee has grown, it remains a balancing act between maintaining external stability and supporting domestic growth in an increasingly uncertain global environment.