MUMBAI, India: India's rupee landed 2026 under pressure after logging its steepest annual decline in three years, weighed down by record equity outflows and lingering uncertainty over a trade deal with the United States that left it out of a broader Asian currency rally.

The rupee was trading at 89.8650 per U.S. dollar at 10 a.m. IST on December 31, putting it down 4.74 percent for the year. That marks its weakest annual performance since 2022, when the currency fell nearly 10 percent.

Over the course of 2025, the rupee repeatedly slid to record lows and at one point weakened past the 91-per-dollar mark, underscoring persistent depreciation pressure.

"The rupee's performance this year was largely a capital-flow story, with the RBI adopting a more pragmatic and flexible approach to the exchange rate and allowing the currency to weaken," said Gaura Sen Gupta, an economist at IDFC First Bank.

India's balance of payments slipped into a deficit of roughly US$22 billion between April and November, the largest on record, highlighting the external pressures facing the economy, Sen Gupta said.

She added that a trade deal with the U.S. could provide some near-term support, potentially lifting the rupee to around 88.50 by March, before underlying pressures resurface and the currency weakens again. A Reuters poll broadly reflects that view.

The rupee's underperformance in 2025 contrasts with its sharp slide in 2022, when aggressive interest rate hikes by the U.S. Federal Reserve fueled a strong dollar rally.

This year, the environment was markedly different. The dollar index fell about 9.5 percent amid Federal Reserve rate cuts and restrictive U.S. trade policies, supporting most Asian currencies. Even so, the rupee lagged behind its regional peers.

Economists attributed that divergence largely to heavy equity outflows and muted capital inflows from other channels. Foreign investors pulled a record $18 billion from Indian equities in 2025, while inflows through debt markets, external commercial borrowings, and foreign direct investment remained subdued.

Extended trade negotiations with Washington further clouded India's outlook, reducing predictability for investors and dampening the rupee's appetite at a time when other Asian currencies faced fewer tariff-related concerns.

The Reserve Bank of India's handling of currency volatility also evolved during the year, particularly after Sanjay Malhotra took over as governor in December 2024.

Since then, the Reserve Bank of India has shown greater tolerance for rupee weakness, with intervention focused on smoothing volatility, anchoring depreciation expectations, and countering one-sided speculative positions rather than defending specific levels, bankers said.

That approach was evident in mid-December, when the rupee breached the 91-per-dollar threshold for the first time. The central bank stepped in forcefully to curb speculative pressure while refraining from targeting a particular exchange rate, market participants said.

As a result of its decline in 2025, the rupee is no longer seen as overvalued. India's 40-currency trade-weighted real effective exchange rate fell to 97.5 in November from 104.7 in January, according to RBI data. Readings above 100 indicate overvaluation, while levels below 100 suggest undervaluation.

Dhiraj Nim, an economist and foreign exchange strategist at ANZ Bank, said that given steep U.S. tariffs, a calibrated policy path tilted toward a mildly undervalued rupee over the medium term could support exporters.

"A weaker INR can cushion the local currency earnings of an impacted Indian exporter, providing relief," he said.