It isn’t Christmassy at all for the Indian currency markets.
The rupee, unmindful of its commitment to the economy, is touching new lows. The domestic unit has been quivering throughout the year, tearing past even 91 against the US dollar, and continues to wobble.
Just as nobody likes a fairy at forty, the markets are slamming banknotes crossing 91 per dollar. Worse, the rupee may remain under pressure owing to a triple whammy, namely, the endless wait over the US-India trade deal, persistent Foreign Portfolio Investor (FPI) outflows, and thinning foreign direct investments. In short, it's not just going to be a lovelorn climax for the rupee this year, but 2026 too may begin on the backfoot.
The rupee began the year at 85.80, and is down nearly 6% against the greenback so far this year and nearly 2% so far in December alone. All of this has seen it emerge as Asia's worst-performing currency. As if it's not enough, the currency further fell to a fresh low of 91 on Tuesday, while projections of the rupee crossing 95 are flying thick and fast, triggering concerns about market stability.
RBI, the vault keeper with the sole authority to lord over the exchange rate, maintains that it won't be guilty of every crash on the calendar. It has been intervening rather prudently, letting the rupee find a level of its liking and taking it on trust that the plans will all work out as intended, eventually.
However, as the domestic currency breached a historic low of 91 this week sliding 1% in just four trading sessions, the central bank intervened aggressively, selling dollars both in the spot and forward markets.
As official data shows, the RBI had pumped $28 billion (excluding this week's interventions) in the forex market through June-October to counter the rupee's fluctuation, though currency markets are rarely grateful for such small mercies. Instead, they expect the central bank to keep its nose to the grindstone always.
The RBI is, however, refusing to go much further and keeping its $700-billion war chest dry. With the central bank's reluctance to launch a multi-billion-dollar dash against the currency crash, the message is loud and clear: the central bank won't play along to defend a nice round number. What's intriguing, though, is the RBI's minimalism at a time when the rupee is heading for its worst annual rattle since 2022. For instance, between 2022 and 2024, the RBI sold over $68 billion in forex reserves to prevent a sharp depreciation.
This time around, the central bank has changed its game, letting the currency weaken. Such a move, analysts reason, will help align the import-export imbalance as a weakening rupee boosts exports. Others also believe that the RBI is letting the exchange rate adjust to changed realities, which in turn could act as a natural macro stabiliser.
Interestingly, the rupee's slide comes at a time when other Asian currencies are heading in the opposite direction what with the US dollar suffering one of its steepest declines in nearly a decade. The dollar index crashed over 9% since the start of the year, prompting traders to build long exposures to Asian currencies, notably the Singapore dollar, Thai baht, and Malaysian ringgit.
Truth be told, a host of factors, unrelated to the central bank's sphere of work, are troubling the Indian currency, just like poor old Gulliver, tied down and jeered by an infinity of Lilliputians.
Foremost among all, the one thing that's dragging the rupee down is a higher demand for dollars. India has been witnessing massive capital outlfows of over Rs 1.56 lakh crore, or $17.8 billion, since January 2025. This is the largest outflow in two decades and is comparable to global distress years such as 2008 and 2022.
When FPIs exit, they sell rupees and buy dollars, accelerating the rupee's fall. And when market participants cannot supply dollars, the central bank becomes the saviour, selling dollars. But that's not happening right now, with the RBI refusing to defend any particular level for the rupee.
What's undeniable is that, given persistent portfolio outflows and deteriorating balance of payments, a further rupee rout cannot be ruled out. But unlike previous currency bouts complicating the RBI's job of managing inflation, cheap Russian oil imports are cushioning the impact to an extent, though gold imports remain unperturbed notwithstanding the steep rise in price of the yellow metal.
Under Governor Sanjay Malhotra, the RBI is also vocal about the central bank's forex management strategy including spot interventions, forward markets, buy-sell swaps, and so on. For instance, recently, Malhotra announced the three-year dollar-rupee buy-sell swaps for liquidity infusion with brevity to avoid market volatility.
In fact, he also dismissed concerns over a falling rupee, terming it as just a side effect of Donald Trump's tariffs, and underlining that when India and the US finalise a trade deal, the pressure is expected to be automatically relieved on the current account.
That said, the RBI's reluctance to walk the whole nine yards and stem the rupee's rout is, perhaps, a refreshing bet. It could act as an economic shock absorber, make Indian exports competitive, partly offset tariff losses, and prevent excessive reserve depletion.
But the downside is that, if the rupee's depreciation boosts exports, high import costs neutralise its impact. For instance, the surge in gold and silver imports too is adding pressure on the currency. During the festive season, gold imports surged by 200% to $14.7 billion, while silver imports jumped 528% to $2.7 billion. When the price for imports rises, India pays more dollars, which in turn increases dollar demand and puts pressure on the rupee.
Meanwhile, even as the weakening exchange rate is causing tremors, exports too are showing signs of fatigue, thanks to high tariffs and a subdued global demand. Exports to the US fell 9% in October, dragging overall monthly exports down by nearly 12% y-o-y. It means exporters earned fewer dollars, contributing to a dollar scarcity and pushing the rupee lower.
Even though the outlook appears unglamorous for the rupee, some argue that the Indian currency is undervalued against the dollar in real terms due to nominal depreciation and relative prices. For instance, the RBI's 40-currency real effective exchange rate (REER) index, which was above 100 until May 2025, fell below 100 following the 50% tariffs imposed by the US. Further, October data shows that the rupee remains undervalued for the third consecutive month, reflecting a softer currency and lower inflation.