The Indian rupee on December 16 breached the crucial 91-per-dollar level and has emerged as one of the worst-performing Asian currencies in 2025. So far in FY26, the currency has fallen almost 6.5%.
Analysts have attributed the rupee’s depreciation mainly to the lack of clarity over an India–US trade deal and continued foreign equity outflows.
Bank of Baroda on Rupee: What’s the big worry
However, the currency’s prolonged losing streak has been somewhat puzzling given the weakness in the dollar index. In its recently published report, Bank of Baroda (BoB) explains what is actually driving the rupee. Here’s a closer look.
#1 Bank of Baroda on Rupee: India–US trade deal uncertainty
Bank of Baroda said the Indian rupee is likely to remain volatile until a trade deal between India and the US is finalised. While the bank expects an agreement to be reached by March 2026, it noted that the rupee’s recent depreciation is being driven more by lingering sentiment of uncertainty surrounding the deal than by underlying economic factors.
#2Bank of Baroda on Rupee:FPI outflows driving the currency lower
Another key factor weighing on the currency- Outflows by foreign portfolio investors (FPI). According to analysts at Bank of Baroda, “This is important because if they are withdrawing then one must wait for a trigger for a turnaround, which can be the deal. But then there are some other factors at work here. The year end theory is probably passe now given that this has not been witnessed every year in December.”
#3 Bank of Baroda on Rupee:Overvaluation concerns divert FPIs away from Indian equities
Some investors believe Indian equities are overvalued, having a way higher P-E ratio compared to the earnings posted by companies. At the same time, global equity markets have significantly outperformed Indian benchmarks, making overseas markets appear more attractive and prompting FPIs to divert funds away from Indian equities.
#4 Bank of Baroda on Rupee: Trade balance not a key concern
Markets had earlier suggested that the country’s trade balance could be weighing on the rupee. However, trade data for November showed an improvement, reducing the fear that exports were slowing due to tariffs imposed by the Trump administration. This suggests that trade is not the main driver of the rupee’s weakness.
The report further highlights that the trade deficit does not have a significant influence on short-term currency movements, as exporters can retain dollar earnings overseas for a period before remitting them. As a result, trade balance does not have a meaningful impact on rupee depreciation.
Bank of Baroda on Rupee :RBI intervention and reserves movement
The central bank can influence the rupee by buying or selling dollars in the market. Bank of Baroda noted that India’s foreign exchange reserves rose until June this year but have declined in recent months, indicating that dollars were likely sold. These factors, along with global trends such as rate cut by the US Federal Reserve, have contributed to the weakening of the dollar.
What the data analysis shows
The BoB report examined factors including FPI flows, trade deficit, RBI dollar sales and purchases, and changes in forward market positions. The study found that no single factor explained more than 14% of the rupee’s movement. Even when combined, these factors accounted for only about 20% of the currency’s movement.
The report also revealed that RBI’s forward market transactions have a greater impact on the rupee than spot market interventions.
Conclusion
In conclusion, The Bank of Baroda report on the rupee’s movement indicates that rge three variables impacting the currency include month-on-month movement in the rupee in percentage terms, absolute net inflows of FPIs in dollars and absolute trade deficit for the country in dollars. However, the analysts at BoB calculated that none of these factors “account for more than 13-14% of the total variation in the currency change. This means that there are factors beyond economics which have a role to play.”