Fall of the Rupee

The Indian rupee’s recent slide past 91 against the US dollar has captured widespread attention, marking a historic low for the currency. This decline reflects a combination of global and domestic pressures that have gathered pace through 2025, making the rupee one of the worst performing major Asian currencies this year. Although the rupee briefly rebounded after central bank intervention, the broader trend reveals deeper structural factors driving the weakness.

At its core, the rupee’s depreciation is the result of market forces responding to a significant mismatch between demand and supply of foreign exchange. India’s trade deficit remains large, fuelled by high import bills for oil, metals and electronics. These imports require dollars, thereby placing sustained pressure on the local currency. At the same time, the country’s exports have failed to keep pace, narrowing dollar inflows and widening the gap between demand for and supply of dollars in the market.

A central feature of this slide has been the uncertainty surrounding trade negotiations with the United States. Long-running discussions over a bilateral trade agreement have made little definitive progress, while the imposition of steep tariffs on Indian exports, in some cases reaching up to 50 per cent, has dulled investor confidence and hurt export competitiveness. Without a clear resolution, foreign portfolio investors have been cautious, and many have withdrawn capital from Indian equities and debt markets. The result has been significant foreign institutional outflows, which in turn has increased demand for dollars and weakened the rupee further.

This capital flight is not just a statistical phenomenon. During 2025, foreign investors have exited Indian markets in large volume, reducing their exposure to stocks and bonds and converting rupees into dollars as they repatriate funds. This process accelerates downward pressure on the rupee because the act of selling rupees to buy dollars increases the latter’s value relative to the former.

Another important driver has been the behaviour of the Reserve Bank of India (RBI). Traditionally, central banks intervene in foreign exchange markets to support their currency by selling foreign reserves when downward pressure builds. This year, however, the RBI’s approach has been comparatively restrained. With domestic inflation low and economic growth strong, the central bank appears to have allowed the rupee to find its own level rather than defend a specific threshold aggressively. This “market-determined” stance has reduced the intensity of direct support for the rupee, thereby allowing depreciation to unfold more visibly.

The global context also matters. While the dollar’s strength is not as pronounced as in some past cycles, geopolitical tensions, higher yields on US assets and a general flight to perceived safe haven assets have attracted capital towards the dollar. This has further compounded the rupee’s weakness relative to the world’s reserve currency. Business Today

The rupee’s decline has tangible consequences for everyday life and businesses in India. A weaker rupee increases the cost of imported goods, particularly fuel, which India imports in large amounts. Higher import costs can feed into broader inflationary pressures, raising the price of essentials from transportation to consumer goods. Students and families planning education abroad will find their expenses significantly larger in rupees, while travellers must budget more for overseas trips.

Industries that rely heavily on imported raw materials or equipment face squeezed margins, and any foreign debt held by firms becomes costlier to service. Even for investors, a weak currency means that overseas assets may become more attractive as hedges against further depreciation.

There are, however, some silver linings to a weaker rupee. Exporters, particularly those in sectors like information technology and services where revenues are often denominated in dollars, may benefit. Their earnings translate into more rupees when converted, enhancing profitability in local terms. Moreover, foreign remittances from non-resident Indians also gain value when brought home in rupees.

Market analysts emphasise that the rupee’s fall should not automatically be read as a crisis. Some strategic observers argue that the currency was undervalued relative to fundamentals and that periodic depreciation is a normal part of economic adjustment, especially for a fast-growing emerging market like India. They suggest that volatility will continue until key uncertainties, notably the outcome of trade negotiations and investor sentiment, are resolved.

In response to the recent volatility, the RBI has also taken targeted actions in the forward markets to reduce imbalances and ease pressures from instruments such as non-deliverable forwards, which had shown elevated premiums due to dollar scarcity. These measures suggest that while the central bank has allowed flexibility in the spot exchange rate, it remains vigilant in managing systemic risks.

In summary, the rupee’s slide past 91 to the dollar is a reflection of complex global and domestic economic dynamics. Trade imbalances, capital flows, tariff-related shocks, and central bank policy have all played a role. As India navigates this period, the immediate focus for policymakers and market participants will be on stabilising investor confidence, advancing trade negotiations and ensuring that the currency’s movement supports long-term growth without exacerbating inflation or import costs.