By Saumitra Bhaduri
The rupee has hit new lows, underperforming many Asian peers. A mix of global dollar dynamics and India-specific forces — portfolio outflows, jump in gold imports, higher government borrowing and concerns about export/IT earnings — is behind this, explains Saumitra Bhaduri
The rupee’s performance in 2025
Over the past six months, the Indian rupee (INR) has experienced significant depreciation, underperforming many other emerging market currencies. As of September 30, 2025, the USD/INR exchange rate closed at 88.79, nearing its all-time weakest level of 88.80, reflecting a decline of over 3.5% for the year and positioning the rupee among Asia’s weakest currencies in 2025.
In contrast, other emerging market currencies have shown more resilience against the US dollar during the same period. The Brazilian real (USD/BRL) has appreciated by approximately 1.29%, the South African rand (USD/ZAR) has strengthened by about 2.39%, and the Indonesian rupiah (USD/IDR) has gained around 1.9% These figures highlight the rupee’s underperformance relative to its peers in the emerging markets.
The Reserve Bank of India (RBI) has been intervening at the margin and appears to be tolerating a gradual depreciation while standing ready to act to contain disorderly moves.
Factors influencing the rupee’s decline
The Indian rupee’s depreciation in 2025 reflects a mix of global and domestic pressures. Capital outflows have been significant, with foreign institutional investors withdrawing nearly $1.8 billion from Indian equities, increasing dollar demand and weighing on the INR.
Trade imbalances remain a concern: although exports grew by 6.7% year-on-year in August, imports fell by 10.1%, but the overall trade deficit persists amid global trade tensions.
Gold imports, which surged to $5.43 billion in August—a 56.7% increase from the previous year—have further amplified dollar demand, highlighting the impact of seasonal and cultural demand on currency stability.
Domestic concerns are compounded by policy shifts abroad, such as the US increase in H-1B visa fees, which has raised investor uncertainty and contributed to capital outflows.
Dollar strength vs rupee weakness
While the US dollar has been argued to have played a role, global trends show a more nuanced picture. The US Dollar Index (DXY), which measures the dollar against a basket of major currencies, declined from 104.21 on March 31, 2025, to 97.93 on September 29, 2025, a drop of approximately 6.6%, indicating a weakening of the dollar over the period.
Specifically, the dollar has shown mixed performance against other major currencies over the same period: it strengthened against the euro (USD/EUR from 1.07 to 1.17, a 9.35% appreciation of the euro), against the British pound (USD/GBP from 1.28 to 1.34, a 4.68% appreciation of the pound), and slightly weakened against the Japanese yen (USD/JPY from 149.62 to 148.59).
Despite this, the INR still depreciated (USD/INR from 85.34 to 88.79) by over 3.5% against the dollar during the same period, suggesting that domestic factors have contributed more significantly to the rupee’s fall. These movements indicate that the rupee’s decline is disproportionately higher, underscoring the influence of domestic economic pressures such as capital outflows, trade imbalances, and rising gold imports.
RBI’s stance and policy options
The RBI has been intervening selectively in the forex market, focusing on managing volatility rather than defending a specific level, and refraining from regular large-scale dollar purchases. The upcoming Monetary Policy Committee meeting in October will be closely watched for signals on further interventions or rate adjustments.
To stabilise the rupee, India needs a multi-pronged approach. Diversifying export markets can reduce reliance on specific economies and enhance competitiveness, while moderating gold imports can help ease dollar demand. Attracting stable, long-term capital flows through policy reforms and infrastructure development is critical, as is maintaining fiscal discipline to bolster investor confidence.
The RBI’s interventions have provided temporary relief, but sustained efforts are required to address the underlying issues. By implementing strategic measures, India can work towards stabilising the rupee and ensuring economic resilience in the face of external shocks.
The writer is professor, Madras School of Economics