By MV Srinivasan
Though the rupee recovered on Tuesday from its record low against the US dollar a day before, it continues to be under pressure. MV Srinivasan looks at the reasons behind the decline, the performance of the rupee vis-a-vis its peers and to what extent exporters stand to benefit from a weaker rupee
Why is the rupee falling?
The rupee is falling due to a combination of factors like the war in West Asia — resulting in a sharp rise in crude oil prices, US tariff uncertainties and foreign capital outflows. In a market with risk-off sentiment, US assets rank among the safest. The Iran war has heightened supply-side fears, mainly for energy imports.
India imports 80- 85% of its crude oil needs, out of which nearly 40% are sourced from the Gulf countries. Globally, 20% of crude oil passes through the Strait of Hormuz. As the war has escalated, the closure of the Strait of Hormuz and production cuts has resulted in a sharp rise in crude oil prices.
Crude prices briefly touched $120 per barrel on Monday – a multi-year high. This could result in the widening of India’s trade deficit and current account deficit alongside capital outflows, which would put pressure on the Indian rupee.
Foreign investors were net sellers in Indian markets withdrawing over Rs 1.6 lakh crore in 2025. In 2026 they are net sellers to the tune of Rs 19,863 lakh crore. On Monday, the rupee hit an all-time low of 92.35 versus the dollar, but strengthened to 91.81 on Tuesday.
Performance vis-a-vis peer currencies
Since the beginning of 2026, the rupee has depreciated about 2.41% versus the US dollar, 1.83% against the Great British Pound (GBP), 1.27% versus the Japanese Yen (JPY). The rupee depreciated 3.47% against the Chinese Yuan (CNY), about 0.12% versus the South Korean Won (KRW), but appreciated against the Vietnamese Dong (VND).
The rupee (INR) traded significantly weaker against Middle Eastern currencies like the Saudi Arabian Riyal, UAE Dirhams and Kuwaiti Dinar.
Will it help exporters?
There is no straightforward answer to this question. It may boost their earnings in the short term, but can also squeeze their profit margins due to higher input and production costs. When the rupee depreciates, Indian goods become cheaper for foreign buyers using dollars. This increases India’s price competitiveness in the global market.
The weaker rupee also helps offset some of the impact of the US trade tariffs, making the effective cost to the buyer more manageable. On the negative side, the falling rupee may hurt exporters who rely on imported raw materials such as raw cotton, electronic components, API for pharma or crude oil derivatives for making their finished products.
The cost of these inputs will increase due to a weaker rupee. Certain competitor countries like Vietnam, Bangladesh, etc., have also devalued their currencies. In addition, the cause of the decline in the rupee, is common to other countries also, resulting in easing global demand.
How this will impact inflation
A weak rupee will hit import prices of crucial imports like crude oil, natural gas, fertilisers, electronic components, edible oils, etc. A one-rupee depreciation in the value of the rupee against the dollar typically increases CPI inflation by 0.2-0.5% basis points.
However, we expect the RBI to exercise monetary policy tools to control both the rupee depreciation and contain inflation pressures.
Impact of a weak rupee on current account deficit
A weaker rupee has a mixed impact on the current account deficit (CAD). In the short term it is negative for the CAD, as higher import costs will translate into higher deficit. Every $1/bbl. rise in crude oil prices can raise the annual import bill by $1.5-2.0 billion.
The CAD reached 1.3% of GDP for Q3 2026 and may widen further in the coming months. Some sectors like IT services, pharmaceuticals, textiles and engineering goods may benefit from a weaker rupee. In the long run, the improvement in export competitiveness will help improve the CAD.
What has been the nature of RBI’s intervention in the currency markets?
The objective of the RBI’s intervention in the forex markets is not to target any exchange rate, but to prevent excessive volatility, maintain orderly market conditions, protect financial stability and manage external sector risks.
The approach aligns with the managed float regime. The RBI intervenes in the spot and forward markets’ (both buying and selling) currency forward and swaps, through NDF (non-deliverable forward) markets. Apart from the above, RBI also does money market operations in case of liquidity mismatch.
The writer is vice president, Mecklai Financial Services
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.