In 2025, rupee fell almost 5% against US dollar, recording its weakest annual performance since 2022. However, 2026 is expected to change that, SBI predicted.Even as dollar weakened and most global currencies gained ground last year, rupee underperformed.According to a recent report by SBI Funds Management, the currency was weighed down by “muted foreign portfolio investor (FPI) inflows, weak export momentum and heightened hedging demand from importers.” Foreign investors pulled out almost $18 billion from Indian equities, citing earnings downgrades, limited exposure to AI-led global growth, and better opportunities in other emerging markets.Looking ahead, the bank expects rupee to decline by around 2% in the next financial year, with the exchange rate hovering near 92 against US dollar.This outlook is supported by several factors. India’s current account deficit is likely to remain below 1% of GDP, helped by strong services exports and relatively low crude oil prices. Inflation is expected to stay close to the Reserve Bank of India’s 4% target, reducing the risk of major currency shocks.Global conditions are also expected to remain favourable. US dollar is likely to stay supportive as the Federal Reserve nears the end of its easing cycle, which is historically a positive for emerging-market currencies. Simultaneously, rupee’s real effective exchange rate has also fallen about 5% below its estimated fair value, boosting competitiveness and limiting downside risks.In addition, capital flows could also turn more favourable. Potential inclusion of government bonds in global indices, stabilising corporate earnings, and renewed foreign portfolio equity inflows may all ease pressure on the rupee.