2025 marked the rupee's most volatile year, depreciating from mid-86 levels to a record high of 91.38 per USD, driven by external shocks and domestic imbalances.[1][3] US-imposed 50% tariffs on Indian goods from April triggered a 5.5% INR slide—the worst among major economies—exacerbating a merchandise trade deficit that ballooned to $25 billion in December from $20.6 billion YoY.[1][3][4] FII outflows hit $18 billion, fueled by equity sell-offs and stalled India-US trade deal uncertainties, pushing REER to a 7-year low of 97.40 in September.[1][4] Domestically, unemployment ticked up to 4.8% and softer GDP momentum at 8.2% in Q3 added pressure, prompting easing expectations.[1][3]

*Table 1: Key USD-INR Pressure Metrics (Sources: [1][3][4])*

IT and pharma exporters like TCS and Sun Pharma benefited from rupee weakness, with TCS reporting 12% revenue boost from forex gains in Q3 FY26, while oil importers like Reliance faced ₹15,000 Cr headwinds.[5] Volatility spiked with option barriers triggered, amplifying intraday swings to 0.42% sessions.[3][4] Looking to 2026, persistent US yields and tariff risks could sustain USD/INR near 90, per Business Standard polls.[2]

The RBI countered 2025 volatility with $70 Bn forex interventions, stabilizing swings despite closing at 89.85/90.95 levels.[1] Restraint was evident—no aggressive defense during initial 91 breach, letting markets price efficiency, per Governor's post-MPC remarks.[1] REER undervaluation (97.40) and NEER drop to 84.6 signaled policy space, avoiding knee-jerk rate cuts amid 8.2% GDP vigor.[1][4] Tools included USD sales via merchant excess demand absorption ($102.5 Bn) and forward premiums to deter speculation.[4] Reserves stood at $650 Bn by Dec 2025, covering 11 months of imports.

*Table 3: RBI Defense Metrics (Sources: [1][4])*

Per Trading Economics, USD/INR forecast: 89.95 Q1 2026, 88.83 in 12 months, assuming RBI continuity.[3] Risks: Further FII exits could test 92 without escalated buys. For investors, RBI's 'letting markets determine' stance implies higher volatility tolerance—plan for 5% quarterly swings.

Retail investors can hedge via NSE currency derivatives, bank forwards, or ETFs, compliant with SEBI's ₹20 lakh annual turnover limit for individuals.[5] Key: USD-INR futures (lot size 1,000) offer 90% cost efficiency vs spot. Example: At 90.70, short 1 lot future locks gains if INR rebounds to 89.

*Table 5: Hedging Tools Comparison (Est. Costs, NSE/Bank Data)*

Actionable Steps on Zerodha: 1) Enable F&O; 2) Short Jan26 USDINR future at 90.70; 3) Margin ~₹50k/lot. Historical: Hedgers saved 3-4% in 2025 volatility.[6] Risk: Over-hedging caps upside if INR strengthens.

USD/INR to average 89.95 Q1 2026, per models, with upside risks to 92 on tariffs/FII flows.[2][3] Tactical shifts: Overweight exporters (IT 25% allocation), underweight importers; use 10-20% hedges. Nifty returns could lag by 5% unhedged amid 4.8% 12M depreciation.[3]

*Table 7: Forward Outlook (Trading Economics[3])* Pros/Cons:

Retail Action: Diversify via ICICI Pru Currency Opp Fund (1Y ret 5.2%, Exp 0.4%).[5]