Over the past 12 months, the rupee depreciated by about 6% against the US dollar, making it one of the weaker performing currencies in 2025. It has also depreciated against other major currencies like the euro. Sebastian Morris explains the reasons for the fall and adds that it could fall even further
l Why the rupee is depreciating
ONE SIMPLE ANSWER is that the Reserve Bank of India (RBI) has stopped or reduced selling dollars into the market as the demand for dollars (generated by imports of goods and services, and outward capital flows) have not been matched by the supply of dollars (generated by exports, and inward capital flows, and remittances). India for a long time has had trade deficits, sometimes of the order of 10% of GDP covered in part by surpluses on remittances (about 3-4%) and IT and services (around 4% again), leaving a gap of around 2% of GDP on the current account. This was, in turn, financed by net capital inflows which have generally been positive.Over the last year and a half the net capital flows have not been adequate leaving the RBI to sell foreign exchange. But it can’t do so for long since its reserves, while seemingly large, amount to only about 20 months of the current account gap.
India’s forex reserves which had been at $700 billion fell to about $693 billion (week ended Dec 19, 2025) as the RBI made an effort to support the rupee from depreciating, only to moderate that effort a little later, allowing it to fall below the psycho-logical threshold of `90 to a dollar.
l How the NDF market impacts the rupee’s value
THE non-deliverable forward (NDF) market (over the counter) helps in hedging or speculating on currencies that are not entirely convertible like the rupee. The market cash settles the difference between an agreed-upon forward rate and the spot rate on maturity. This allows businesses, including exporters and importers, to hedge risk or to take advantage of expected trends in currency values, i.e., to hedge currency fluctuations. So when it was widely accepted that the RBI would have to allow the rupee to settle at a lower value, this market could have been used to push the value down. The RBI’s ability to punish such positions is limited, unlike in the case of the Chinese central bank with regard to the yuan.
l Rupee vs its peers & impact on exports
EXPORT GROWTH WHICH had been robust in the preceding years has fallen to low levels, and the gap between exports and imports relative to both GDP and to trade has risen sharply over the year. The Chinese or the Vietnamese currency is highly undervalued relative to its intrinsic value, thus keeping up their export growth and trade surpluses, and a pressure from the market for appreciation. In 2025, the Chinese trade surplus was $1 trillion. Chinese exports recovered much faster and stronger than its imports from 2023, and that has increased India’s trade deficit. The quick Chinese devaluation of the yuan in 2022 and early 2023 was a force behind the Chinese revival. India, despite having a potentially stronger export response to currency depreciation, chose not to in 2023, which only made the market push the currency down at the cost of the economy.
l l Impact of US actions on RBI’s forex reserves
THE US ATTEMPT to reduce its current account deficit did much damage to its other objective of ensuring that the dollar remains the near exclusive global (reserve). The freezing of Russia’s foreign assets by European nations furthered the risks to central banks outside the western world in holding foreign currency deposits. The shift into gold and away from dollars got wings, and resulted in the dollar falling against the euro. That has given the US a temporary advantage in income growth which has thus kept a reasonable pace, though with much pent-up inflationary potential. The RBI too was forced to buy gold which would have contributed modestly to the depreciation pressure. Interestingly, the net foreign assets of the RBI
have declined only modestly though the foreign currency assets have had a steeper fall.
l What is the outlook for 2026?
THE RBI HAS finally let the rupee adjust to a lower value. This fall has taken place when the US currency itself has depreciated against a basket of currencies. This means that the rupee’s depreciation against all currencies over the year has been in excess of 15%, perhaps close to 18%.
The rupee is likely to breach the 90 rupee to a dollar mark again, and fall even more to about 93 or so by the end of February. The continuing weakness stems from the widening gap between India’s growth rate and the rest of the world’s growth rate. With the US tariffs having dealt a big blow to India’s exports, further fall in the rupee is most likely unless the
central bank, for political reasons, supports the currency, or the higher growth is pulled back by the government.