The Indian rupee has plummeted to a new record low, trading at 88.47 against the US dollar, marking a 36 paise decline. This sharp depreciation reflects a confluence of global and domestic factors that are currently weighing on the Indian currency.
Several factors are contributing to the rupee's weakness. Escalating trade tensions between the U.S. and India, characterized by the imposition of tariffs, have significantly dented investor confidence. These tariffs, which took effect last month, are projected to decrease India's merchandise exports to the U.S. by an estimated $5.76 billion in 2025, affecting key sectors such as electronics, seafood, and gold. The resulting decline in export revenues reduces foreign exchange inflows, placing downward pressure on the rupee.
Global monetary policy and the dollar's strength also play a crucial role. Discussions of a more gradual approach to Federal Reserve rate cuts in mid-2025 caused the dollar to appreciate, as the timing for reductions was pushed back and real yields remained high. When U.S. interest rate expectations firm up, dollar assets become more attractive, leading to capital rebalancing away from emerging markets like India. This puts upward pressure on the USD/INR exchange rate.
Persistent import demand, particularly for oil, further exacerbates the rupee's woes. A combination of geopolitical strain and rerouting of oil supplies has increased import bills, leading to higher near-term dollar demand from state oil companies and private refiners. Since India imports over 88% of its crude oil requirements, fluctuations in global oil prices have a direct impact on the country's economy and the strength of the rupee.
Foreign capital flows are another critical determinant. Concerns regarding tariffs and global monetary policies have led to intermittent equity outflows and increased demand for dollar liquidity. Foreign investors have withdrawn a net of $11.7 billion from India's debt and equity markets so far this year.
The Reserve Bank of India (RBI) is actively intervening in the forex market to manage the rupee's volatility. The RBI has been selling dollars around the 88.20 level to moderate the rupee's decline. Direct intervention by the RBI in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are major influencing factors on the Rupee.
Despite the current pressure, some analysts suggest the rupee's downside may be limited. Analysts at YES Securities believe the rupee's slide past the 88-mark largely reflects U.S. tariff-driven sentiment rather than a deterioration in India's underlying fundamentals. They also point out that the real effective exchange rate (REER) suggests the rupee is not structurally overvalued and may even be on the brink of undervaluation.
Looking ahead, the rupee is expected to remain under pressure amid global uncertainties. While the RBI is likely to step back from heavy intervention, it will likely implement measures to manage rupee depreciation. The rupee is forecasted to trade within the 87.00 - 89.00 range during 2025.
