The Indian rupee weakened by 17 paise to 88.26 against the U.S. dollar in early trading on Monday, September 1, 2025. This decline is attributed to persistent foreign fund outflows (FII) and concerns stemming from increased tariffs imposed by the United States.

Factors Contributing to the Rupee's Weakening

• FII Outflows: Foreign Institutional Investors have been net sellers of Indian equities, pulling out significant amounts of capital. In the calendar year 2025, FIIs have withdrawn approximately USD 13.23 billion from Indian equities, reflecting a risk-averse approach among global investors. In August alone, FIIs withdrew ₹34,993 crore from Indian equities, marking the sharpest retreat this year. This continuous outflow of foreign funds puts downward pressure on the rupee. Sectors like IT, FMCG, and Power have faced the biggest sell-offs.
• US Tariff Hikes: The United States has imposed additional tariffs on Indian goods, which has negatively impacted investor sentiment. Washington's decision to increase tariffs by 25% has effectively doubled the total duties on some Indian goods to 50%. These tariffs can lead to increased costs for importers and potentially higher prices for consumers. The US average effective tariff rate stands at 15.8%, a notable increase from 2.3% at the end of 2024.
• RBI's Stance on Currency Flexibility: The Reserve Bank of India (RBI) has shown a greater tolerance for currency depreciation under the guidance of Governor Sanjay Malhotra. Since March 2025, the rupee has depreciated by over 3.30%. The RBI's intervention to contain the rupee's decline has also led to a significant drop in India's foreign exchange reserves, which now stand at $690.72 billion. Some analysts suggest the RBI may be allowing the rupee to slide to support exporters affected by US tariffs.
• Global Economic Factors: Broader market uncertainty stemming from US trade policy and weaker-than-expected domestic earnings have contributed to the rupee's struggles. Concerns about India's relatively high valuations compared to other emerging markets are also driving FIIs to rotate capital to cheaper destinations.

Impact on the Indian Economy

• Importers and Corporates: A weaker rupee poses challenges for importers, who face increased costs for companies with unhedged positions. Corporates holding forex derivative deals are also feeling the pressure.
• Exporters: On the other hand, a weaker rupee could enhance export competitiveness. The government is reportedly considering support measures for exporters, including export promotion missions and loan moratoriums, to mitigate the impact of increased US tariffs.
• Inflation: With inflation not currently a major concern, the RBI may be less inclined to intervene aggressively to defend the rupee.

Market Outlook

• The rupee is likely to remain under pressure in the near term. The breach of the 88 per dollar mark has emboldened speculators, potentially leading to further downside risks for the currency.
• The upcoming US non-farm payroll report is expected to influence the rupee's near-term direction. A weaker-than-expected report could raise hopes of an interest rate cut in the US, which could lend some support to the rupee.
• Some analysts believe that India's strong fundamentals, such as digital growth and demographic strength, are expected to re-attract FII interest in the medium to long term. However, stable policy frameworks, improved corporate governance, and enhanced earnings growth will be critical for restoring FII confidence.
• The US tariff hikes are expected to have a wide-ranging impact, creating uncertainty in the markets and potentially straining key trading relationships. Increased costs from tariffs can affect transfer pricing arrangements and compliance. Some businesses may need to re-evaluate their manufacturing strategies and diversify their production bases.