The Indian Rupee (INR) has depreciated by approximately 4.7% against the US dollar so far in 2025, making it one of the worst-performing currencies in Asia. This decline has raised concerns about its potential impact on India's economy. Several factors contribute to the rupee's weakness, including global capital flows, high import demand, and uncertainty surrounding the US-India trade deal.

Factors Behind the Rupee's Fall

• Global Factors: Higher U.S. interest rates have attracted capital towards dollar-denominated assets, increasing demand for the dollar and putting downward pressure on other currencies, including the rupee. Geopolitical uncertainties also contribute to a "rush toward safe haven currencies" like the dollar.
• Trade Deficit: India's demand for imports, particularly gold, electronics, and machinery, remains high, while exports to major markets like the U.S. have softened, widening the trade deficit.
• US-India Trade Deal Uncertainty: The imposition of steep U.S. tariffs (up to 50%) on Indian goods challenges export competitiveness and dents investor confidence.
• Capital Outflows: Foreign Portfolio Investors (FPIs) have been pulling funds out of India.
• RBI Intervention: The Reserve Bank of India (RBI) has been actively intervening in the market to try and stabilize the rupee, selling dollars from its reserves. From October 2024 to September 2025, the RBI sold $65 billion in the spot market and had a $63.6 billion short forward position.

Impact on India's Economy

A weaker rupee can have both positive and negative effects on the Indian economy.

Negative Impacts:

• Imported Inflation: India imports a significant portion of its crude oil (90%), edible oils, and other essential commodities. A weaker rupee makes these imports more expensive, leading to imported inflation.
• Increased Subsidy Burden: Higher import prices for items like fertilizers can increase the government's subsidy bill.
• Higher Cost of Overseas Liabilities: Indian companies with dollar-denominated debt face higher repayment and interest servicing costs.
• Sentiment: Weaker rupee can impact manufacturing and services sentiment, and raises policy uncertainty perception.

Positive Impacts:

• Export Competitiveness: A weaker rupee makes Indian exports cheaper and more competitive in the global market.
• Remittances: Remittances from overseas become more attractive as dollar earnings convert into more rupees.
• External Balances: Trade and service balances generally improve with a lag after depreciation.

Overall Economic Impact

Bank of America (BofA) has warned that the rupee's depreciation could trigger a five-channel macro shock affecting sentiment, growth, inflation, external balances, and fiscal finances. They also noted that the weakness in rupee can be a negative in the near term, but a positive in the longer term, as it tends to influence both consumer and producer behavior, through changes in both output and price setting behavior.

While the rupee's fall presents challenges, some analysts believe that the impact on most households will be manageable unless the depreciation becomes sudden or severe. The Indian economy has shown resilience, with GDP growth beating estimates. A strong economy helps the rupee, but it is not the only factor.

Potential Measures to Restore Rupee Value

The following measures can be taken to restore the value of INR:

• Monetary Policy Measures: Foreign exchange intervention by RBI, increasing interest rates, currency swap agreements, etc.
• Fiscal Policy Measures: Reducing import dependency by incentivizing domestics production, boosting exports through diversification and FTAs, attracting FDIs with support to infrastructure and ease of doing business, etc.

BofA expects USD weakness in 2026 to support gradual INR gains, forecasting the rupee at 86 per dollar by end-2026 if conditions stabilize.