Mumbai – The Indian Rupee recently plunged to a record low, breaching the 90-per-dollar mark for the first time in late 2025. This significant depreciation, roughly 5 to 6 percent in 2025, comes despite India recording robust economic growth, with its Gross Domestic Product (GDP) expanding by 8.2 percent in the second quarter of fiscal year 2026. This performance makes India the fastest-growing major economy globally. T^{[1][2][3][4][5]}he currency's weakness presents a puzzle for many, as strong domestic fundamentals do not always translate into a strong currency. ^[1]Dollar Strength and Capital Outflows Fuel Rupee Weakness Several factors, both global and domestic, contribute to the rupee's sustained weakness. A major global driver is the continued strength of the US Dollar. Rising US Treasury yields and slower interest rate cuts by the Federal Reserve have strengthened the Dollar Index (DXY) against emerging market currencies. T^[6][7][8]he US dollar often acts as a "safe haven" during times of global economic uncertainty, drawing capital away from markets like India. H^[8][9][10]igher US interest rates make dollar-denominated assets more attractive, pulling foreign capital out of Indian markets. ^{[1][11][9][12]}Foreign Institutional Investors (FIIs) have significantly pulled funds from India. FIIs withdrew an estimated $16.5 billion in 2025, with total outflows from Indian equities reaching Rs 1.58 lakh crore (approximately $18.9 billion) during the year. T^{[6][13][3][14]}hese outflows increase demand for dollars as investors repatriate their funds, putting downward pressure on the rupee. ^[6][5]Persistent Trade Deficit Adds Pressure Domestically, India's persistent trade deficit remains a key concern. The country's high reliance on imports, particularly crude oil, electronics, and gold, drives up demand for US dollars. I^[15][9]ndia recorded a substantial trade deficit of $41.7 billion in October 2025. W^[6][5]hile the deficit improved to $24.53 billion in November 2025, largely due to a sharp fall in gold imports and increased exports, the underlying structural demand for imports continues to pressure the rupee. ^[16][17][4]Uncertainty surrounding a long-pending US-India trade deal also adds to investor caution. High US tariffs, some as steep as 50 percent on Indian goods, reduce India's export competitiveness, further impacting dollar inflows. T^[6][7][4]his lack of a comprehensive trade agreement discourages foreign investment and raises currency risk premiums. ^[6][7]Reserve Bank of India Intervenes to Manage Volatility The Reserve Bank of India (RBI) has actively intervened in the foreign exchange market to curb sharp depreciation. The central bank sells US dollars from its substantial forex reserves to increase dollar supply and stabilize the rupee. I^{[6][15][7][18][19]}n recent instances, aggressive dollar sales by the RBI led to a nearly 1 percent appreciation of the rupee in a single day, pulling it back from record lows. I^[7][20][21]ndia's foreign exchange reserves stood at a robust $688.95 billion by December 8, 2025, providing the RBI with significant ammunition for intervention. ^[19][20]However, the RBI's stated policy is to manage volatility rather than rigidly defend a specific exchange rate. E^[9][22]xperts note that the rupee's depreciation is not necessarily seen as harmful to the economy, especially with India's low inflation rate, which was 0.71 percent in November 2025, up slightly from a record low of 0.25 percent in October 2025. T^[4][23][24]he RBI even cut its benchmark interest rate by 25 basis points to 5.25 percent in December 2025, signaling a focus on growth amid benign inflation. ^[23][25]Impact on Economy and Outlook A weaker rupee makes imports more expensive, potentially fueling domestic inflation, particularly for essential goods like crude oil and electronics. I^[15][9]t also increases the cost of servicing foreign-currency loans for Indian businesses and the government. C^[6][8]onversely, a depreciating rupee can make Indian exports more competitive in global markets, offering some support to export-oriented sectors. ^[17][4][26]Analysts generally expect the rupee to remain under pressure in the near term due to ongoing global and domestic factors. However, some anticipate a potential reversal in FII outflows in 2026, driven by India's strong GDP growth and improving corporate earnings. T^[13][14]he long-term trajectory of the rupee will depend on global capital flows, commodity prices, and the resolution of trade uncertainties.

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