The Indian Rupee recently plummeted to an unprecedented low of 90.56 against the US dollar on December 12, 2025, marking a significant milestone in its downward trajectory. This historic fall reflects a substantial real depreciation, with the currency's Real Effective Exchange Rate (REER) weakening by an estimated 8.6% year-to-date until November and over 12% in the past year. This sharp decline, described by some as a "torrential monsoon," is poised to reshape various aspects of India's robust economy.^{[1][2][3][4][5][6][7][8]} ### Trade Tensions and Capital Outflows Drive Rupee Weakness Analysts point to several key factors behind the rupee's persistent weakness. Uncertainty surrounding an ongoing India-US trade deal plays a major role. Steep US tariffs, some as high as 50% on Indian imports, challenge export competitiveness and dampen investor confidence.^{[9][2][10][3][6][11]} Foreign investors have also withdrawn roughly $18 billion from Indian equities this year, exacerbating the decline.^[12][13] This capital outflow, coupled with strong dollar demand from importers and global risk aversion, has intensified selling pressure on the rupee.^[2][5][14] The Reserve Bank of India (RBI) has actively intervened in the foreign exchange market to stabilize the currency. The central bank reportedly sold $65 billion between October 2024 and September 2025.^{[12][1][9][8]} In December 2025, the RBI also announced a ₹1 trillion Open Market Operation purchase and a $5 billion dollar-rupee swap to boost banking liquidity and support market stability. R^[15]BI Governor Sanjay Malhotra stated the central bank will intervene to curb volatility but does not have a target level for the rupee. ^[13]### Impact on Inflation and Trade Dynamics A weaker rupee typically leads to higher import costs, which can fuel inflationary pressures. India imports a large proportion of its crude oil, edible oils, and other essential goods. H^{[12][1][13][11]}owever, current global commodity prices, particularly for crude oil, have decreased, potentially mitigating severe inflationary effects despite the rupee's depreciation. B^[12][1][8]ofA Securities estimates that a 1% change in REER can lead to roughly 7 basis points of inflation impact. ^[7]On the other hand, a depreciating rupee generally improves the trade balance. It makes Indian exports more competitive in global markets and reduces import demand. R^{[12][4][16][11]}esearch suggests that a 5% depreciation in the REER can lead to a 2.3% reduction in imports, potentially boosting India's GDP growth. A^[12][4] study by Bank of America Securities suggests the current depreciation could save India between $7 billion and $12 billion, significantly improving the trade balance over time. ^[12][4]### Corporate Margins and Investment Decisions Affected The rupee's depreciation impacts corporate margins, especially for companies reliant on imported raw materials or those with significant dollar-denominated debt. Servicing overseas liabilities becomes more expensive, potentially straining balance sheets. T^[12][11]he weak rupee can also negatively affect business and consumer confidence, particularly if foreign capital outflows persist. ^[12][1][4]Despite these challenges, a weaker currency can offer long-term benefits by encouraging domestic production and improving export competitiveness. V^[4][16]ishrut Rana, an analyst, told Forbes India in December 2025 that while the depreciation presents short-term headwinds, it does not inherently signal weakness in the underlying economy. H^[16]e added that a weaker rupee benefits exporters as their costs in USD terms decrease, leading to higher profit margins. ^[16]### Looking Ahead: Stabilisation and Reforms The future trajectory of the Indian Rupee largely depends on the resolution of the India-US trade deal and overall global economic conditions. Analysts from BofA predict the rupee could recover to around 86 per dollar by the end of 2026, assuming a weaker dollar and improved market sentiment. H^{[12][1][3][7]}owever, MUFG warned in October 2025 that the rupee could stay on the defensive, forecasting a decline towards 89.75 "over time" if tariffs persist. ^[3]The RBI continues to implement measures to promote the internationalization of the rupee, aiming to reduce dependence on the US dollar. T^[17][18]hese steps include allowing banks to lend in Indian Rupees to non-residents in Bhutan, Nepal, and Sri Lanka for cross-border transactions. S^[17][18]uch reforms, alongside sustained strong domestic growth, could provide a cushion against future currency fluctuations and capital outflows. ^[16]

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