The Indian Rupee has plummeted to a historic low against the US dollar, triggering widespread concern about its potential ramifications for the Indian economy. On December 12, 2025, the rupee touched a new low of 90.56 against the greenback, marking a significant depreciation. This decline is primarily attributed to the uncertainty surrounding the India-US trade deal and continuous foreign fund outflows, coupled with increased dollar demand from importers amidst rising precious metal prices.
Several factors have contributed to the rupee's recent weakness. Heightened US tariffs on Indian exports and ambiguity surrounding the India-US trade deal have triggered notable foreign portfolio withdrawals. Geopolitical tensions, including the Russia-Ukraine war and unrest in the Middle East, have amplified risk aversion, prompting investors to seek safe-haven assets like the US dollar. Higher US interest rates have further incentivized global investors to direct capital towards US Treasuries, reducing USD liquidity in India and putting downward pressure on the rupee.
The depreciation of the rupee has far-reaching implications for the Indian economy. A weaker rupee increases the cost of imports, potentially leading to imported inflation. This can affect essential imports such as crude oil, fertilizers, and electronics, adding to input costs for businesses. The Reserve Bank of India (RBI) might be prompted to adjust interest rates if inflation rates rise above 4%. However, decreased global commodity prices, particularly for crude oil, could mitigate severe inflationary effects.
While a weaker rupee poses challenges, it also presents opportunities. Export-oriented sectors, including IT and services, benefit as USD earnings translate into higher INR revenues. A weaker rupee can improve the trade balance by making exports more competitive and reducing import demand. A 5% depreciation in the Real Effective Exchange Rate (REER) can lead to a 2.3% reduction in imports, potentially boosting GDP growth.
The India-US trade deal is a critical factor influencing the rupee's trajectory. An effective resolution may pave the way for a relatively stronger rupee. The finalization of a trade deal to reduce tariffs would reduce uncertainty for equity investors and boost growth momentum, supporting corporate earnings and easing equity valuation concerns. India is prepared to increase purchases of American defense equipment, energy supplies, and aviation products as part of the trade discussions. However, India has made it clear that agricultural goods from the US will not be given entry under the agreement, as it could hurt millions of Indian farmers. Six rounds of negotiations have already occurred, with the goal of more than doubling bilateral trade to $500 billion by 2030. While some progress has been made, a framework pact may be ready by March 2026.
Looking ahead, the rupee's performance will depend on the resolution of the India-US trade deal, global economic trends, and domestic fiscal policies. Analysts anticipate moderate fluctuations in the INR throughout the remainder of 2025, trading within a range of 84.80 to 85.80 against the USD. However, some forecasts predict a gradual depreciation of the INR, potentially reaching levels around 87.50 to 88.50 by the end of the year. The RBI's interventions in the foreign exchange market will also play a crucial role in managing the rupee's volatility. While the bank's reserves remain sufficient, ongoing capital outflows may challenge the sustainability of its operations.
Despite the current challenges, India's economy has strong fundamentals. India's GDP grew 7.8% year-over-year in the April to June quarter of fiscal year 2025 and 2026. Deloitte projects baseline economic growth of 6.7% to 6.9% this fiscal year and 6.5% to 6.9% the following fiscal year, supported by direct income tax exemptions, continued goods and services tax (GST) reforms, an accommodative monetary policy, and a possible trade deal with the United States.
