CHENNAI: The rupee sank to an all-time low of Rs 89.73 per US dollar in early trade on Monday, slipping past the previous records near Rs 89.49. The slide comes despite India’s recent strong economic growth numbers: the upbeat macroeconomic backdrop failed to offset pressures from weak capital inflows and shaky trade-deal prospects.
The principal drivers behind the rupee’s sharp drop include persistent foreign outflows — across both equity and debt investments — and disappointing flows into the country’s foreign-exchange (FX) system. At the same time, the long-mooted trade agreement between India and the United States remains elusive, dousing hopes that a deal might galvanize dollar-inflows or improve sentiment for the rupee.
Importers’ dollar demand is also strong amid a widening trade deficit and hefty foreign-exchange needs, especially for crude oil, raw materials and other imports. This elevated demand for dollars, unbalanced by adequate dollar supply via inflows or export receipts, has exacerbated downward pressure on the rupee.
Adding to the strain, hedging activity in the non-deliverable forward (NDF) market has increased, as importers and corporates lock in dollar exposure ahead of uncertainty — amplifying broader dollar demand. Even though the Reserve Bank of India (RBI) has intervened — including occasional dollar sales — the intervention has been insufficient to arrest the slide, and the currency continues to weaken under structural pressures.
The implications of this depreciation are mixed. For exporters, a weaker rupee makes Indian goods more competitive abroad, potentially boosting export volumes. Remittances from abroad also convert into more rupees, offering some benefit to households earning in foreign currency. On the flip side, imports — especially of crude oil and other essentials — become more expensive. That raises costs for businesses reliant on imported inputs and pushes inflation up, which could weigh on consumption and production costs across sectors.
From a macroeconomic standpoint, persistent rupee weakness alongside a widening trade deficit and capital outflows could erode foreign exchange reserves and narrow the external-financing cushion. That in turn could limit the RBI’s flexibility in defending the currency or managing liquidity over the medium term.
Looking ahead, the rupee’s near-term trajectory will likely remain vulnerable unless there is a turnaround in foreign-portfolio flows, fresh foreign direct investment, or clarity and progress in trade-deal negotiations that could restore investor confidence. Meanwhile, importers and corporates are expected to continue hedging dollar exposure, dollar demand is likely to stay elevated, and any global dollar-strengthening (or weakness in crude prices) could further influence INR valuation.
In sum, while India’s growth story remains intact, structural external pressures — weak flows, import-demand, stalled trade deals — are tilting the balance in favour of a weaker rupee. Absent a sharp improvement on the inflows or trade front, the downward pressure on the currency seems set to persist for some time.