The rupee slipped to an all-time low of 88.44 against the US dollar, losing 34 paise on Thursday, pulled down by the demand for the greenback from importers and sustained foreign outflows.
“Large FPI outflows and corporate dollar demand hit the market simultaneously, but unlike earlier, the RBI chose not to intervene, allowing the rupee to fall,” said Anindya Banerjee, head of currencies and commodities at Kotak Securities. The rupee had hit its previous record low of 88.36 on Friday.
Banerjee said the RBI’s hands-off stance was also to offer exporters some cushion amid trade uncertainty.
Reasons behind the Rupee’s plunge
On Thursday, after a weak opening lower at 88.12, the rupee touched an all-time intra-day low of 88.45 before closing at 88.44. Trade uncertainty between the US and India has seen a sustained outflow of foreign investors. Sentiment for the rupee is also negative due to concerns over the current account balance and the possibility of an increase in the trade deficit.
FPI outflows from domestic equity markets since July 2025 to date are to the tune of `65,000 crore. This has put pressure on the rupee, which has lost nearly 3.5% in the current financial year — the biggest loser among Asian currencies. Barring the Hong Kong dollar, which has lost 0.11%, the rest of the Asian currencies in FY26 have gained from 0.04% to 9.5%.
“Despite the dollar index easing from 109 to 97, the rupee hasn’t gained, it’s quoting at a steep discount due to persistent uncertainty,” Banerjee said.
“Until a US-India trade deal materialises, this discount will remain. With RBI adopting a hands-off stance and volatility rising, the rupee could test the psychological 90-mark this month unless global risk sentiment improves,” he added.
“RBI is closely tracking the Chinese yuan as China is a big exporter and competitor to India and thus may not intervene aggressively to maintain export competitiveness against them,” said Kunal Sodhani, head of treasury at Shinhan Bank, who states that structurally the rupee is overvalued. “REER (real effective exchange rate) index (for a basket of 40 currencies) for July stands at 100.07 as against the long-term average of 103.20, which suggests that the rupee is structurally overvalued. RBI has always been clear not to set any level but to curb any kind of excess or unforeseen volatility. For dollar-rupee, 87.85 acts as an important support while 88.80 levels may be tested,” he adds.
RBI’s strategic shift: A new approach to currency management
The Reserve Bank of India (RBI) appears to be allowing the rupee to find its own level, diverging from its historically interventionist approach. “Ever since we have had a new governor, there has been less intervention in the forex market. It’s been a ‘let the market find the rate’ approach most of the time,” said a senior official of a public sector bank, adding that this shift is perceptual rather than officially stated.
While the RBI has traditionally stepped in during sharp intra-day movements, this year there have been instances where the rupee has fallen as high as 50-60 paise in a day without intervention. This hands-off approach has caught speculators off guard. “People (traders) who have gone short are caught on the wrong foot,” said the banker, explaining that the usual expectation of RBI support at certain thresholds has not materialised, disrupting speculative trades and reinforcing the perception that the central bank is comfortable with a weaker rupee.
“RBI’s passive stance on rupee signals a strategic shift,” adds Madan Sabnavis, chief economist at Bank of Baroda. He attributed the recent rupee depreciation to foreign portfolio investor (FPI) outflows and believes the RBI may be tacitly leveraging rupee depreciation to offset export competitiveness lost due to global tariff pressures. “There’s definitely an advantage in terms of regaining export competitiveness,” he said, while cautioning that the broader currency environment, especially the weakening dollar index, should ideally support rupee appreciation. “Still, the fair rate for the rupee would be 87.50,” he said, underscoring the difficulty in predicting short-term movements amid shifting global and domestic cues.