WHY THE RUPEE IS BREAKING NEW LOWS: THE UNTOLD STORY BEHIND INDIA’S 2025 CURRENCY STRESS

 

The Indian rupee crossing Rs.90 per US dollar marks its weakest level on record and has quickly become one of the most important macro developments of 2025. The move is not an overnight reaction but the result of a persistent shortage of dollars in the economy. To understand why the pressure intensified this year, it is essential to look at the Balance of Payments (BoP) the system that captures how dollars flow in and out of the country.

 

 

The Dollar Shortage: Where the Pressure Originates

 

 

At the core, the rupee depreciates when dollar demand exceeds dollar supply. Currently, both key components of India’s Balance of Payments the current account and the capital account are turning unfavourable simultaneously, tightening dollar inflows and putting downward pressure on the rupee

 

 

Current Account: Dollars Leaving Faster Than They Come In

 

 

India’s current account is showing clear signs of stress more dollars are leaving the country than coming in, and the gap is starting to weigh on the rupee.

 

 

• Gold and Silver Imports Go Through the Roof

October 2025 saw India’s merchandise imports hit a record $76.1 billion, up 16.6% YoY. The big culprit? Gold and silver, which together jumped threefold compared to last year, fueled by festive buying, speculative demand, and industrial needs (think electronics, EVs, solar panels, and pharma). Non-oil, non-gold imports also grew 12.4%, adding to the dollar outflow pressure.

 

 

 

• Exports facing headwinds.

While imports raced ahead, exports stumbled. Merchandise exports fell 12% to $34.4 billion, with most categories underperforming. Electronics were a rare bright spot (+19.1%), thanks to US tariff exemptions. Exports to the US alone dropped 8.6% in October, and shipments to other regions fell 12.5%. Overall, US-bound exports shrank 10.2% YoY during September-October, reversing the early FY2026 gains. The merchandise trade deficit jumped to a record $41.7 billion in October, compared with $26.2 billion a year ago and the H1 FY2026 average of around $26 billion per month. This widening gap is expected to push India’s current account deficit up to about 2.4–2.5% of GDP in Q3 FY2026, from roughly 1.8% in Q2

 

 

• Remittances Under Pressure

India’s largest private source of dollars remittances is slowing. Tight labour markets abroad, inflation, and visa restrictions have reduced inflows. A proposed 5% US tax on international transfers could impact nearly 45 lakh Indians, cutting an estimated $1.6 billion from remittances if enacted.

 

 

Capital Account: Outflows Add Pressure on the Rupee

 

 

India’s capital account is under pressure as foreign investors exit and some FDI returns flow overseas, increasing demand for dollars and weighing on the rupee.

 

 

Foreign capital comes into India in two main forms: Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). FPIs are short- to medium-term investments in stocks, bonds, or other financial assets, made primarily for returns, without giving investors control over companies. In contrast, FDIs are long-term investments in businesses, where foreign investors acquire ownership stakes and sometimes management influence, though profits and exits are eventually repatriated.

 

 

FPI Outflows
Foreign portfolio investors have been steady sellers through 2025. Total FPI outflows have hit Rs. 1.56 lakh crore (~$17.8 billion) so far, including Rs. 13,121 crore ($1.46 billion) withdrawn in just the first four days of December.

 

 

The drivers are global rather than local:

 

 

• Global investors are rotating into the AI megatrend, pouring money into US big-tech names and semiconductor giants Nvidia, Microsoft, AMD, Broadcom, as well as Taiwanese chip manufacturers and other hardware suppliers feeding the AI boom.

 

• India lacks large-cap AI pure plays or semiconductor majors that can compete with these global leaders, so global capital is flowing toward markets that directly benefit from the AI supercycle.

 

• A weak rupee, delays in the India-US trade deal, and year-end portfolio reshuffling have added to selling pressure.

 

 

Each time FPIs sell Indian equities, they convert their rupee proceeds into US dollars — directly increasing dollar demand and weakening the rupee.

 

 

FDI Repatriation
While FDI inflows appear stable, profits and exits eventually flow back abroad, adding to dollar demand. A notable example is SoftBank’s investment in Lenskart, the largest selling shareholder in the IPO, offloaded about 2.5 Cr shares. At the issue price of INR 402, SoftBank will rake in INR 1,025 Cr. This translates to a 5.4X return on its investment.

 

 

RBI’s choice: a different foreign-exchange regime and a lighter defence

 

Historically, the Reserve Bank of India intervened more actively to smooth sharp moves by selling or buying dollars from its forex reserves. But the approach has evolved.

 

 

Regime evolution:

 

1) The Pegged Era (Before 1991): RBI Fixed the Rupee Like a Price Tag

Before liberalisation, the rupee behaved like an item with a fixed MRP the RBI literally decided the price.

• Through the 1980s, the rupee was pegged to a basket of currencies, and RBI determined the level (e.g., Rs. 17-Rs.20 per USD).
• If demand for dollars rose, RBI sold dollars from its reserves to keep the rate unchanged.
• If exporters brought in excess dollars, RBI bought them to maintain the peg.

 

Reserves fluctuated sharply because RBI had to constantly defend the level like holding an umbrella against a storm.

 

 

 

2) Managed Float (1993–2023): Market Sets the Price, RBI Controls Turbulence

After reforms, India moved to a system where the market determined the rupee, but the RBI stepped in to prevent disorderly swings.

 

 

 

3) “Stabilized Arrangement” (2023–2024): An Informal Band Emerges

During this period, RBI behaviour showed a soft band in practice (even though not officially declared).

Example: Market observed that USD/INR rarely moved outside Rs. 82-Rs.84 for months:

• If the rupee went toward Rs. 82, RBI quietly bought dollars, increasing reserves.
• If it moved toward Rs. 84, RBI sold dollars, dipping into reserves.

This created a perception of “RBI is keeping the rupee inside a 2% zone.” This is what the IMF earlier called a stabilised arrangement.

 

 

 

4) 2025 Onwards: Crawl-Like Regime (Slow, Guided Adjustment)

The Governor has signalled a shift to a crawl-like path:

• The rupee can move slowly in one direction over time.
• RBI still smooths volatility but does not defend one specific level.
• Over six months, the rupee may drift gradually within a narrow trend band.

 

 

Example:
Instead of defending Rs. 84 tightly, RBI lets the rupee slide 0.5-1% every few weeks if global dollar strength continues - while preventing sudden jumps like Rs. 84 to Rs. 87 overnight. This is exactly what IMF now classifies as a crawl-like arrangement

 

 

Why these matters: if the RBI no longer tries to defend a particular rupee level by continuous dollar sales, the currency can fall further in response to market forces. That is precisely what we’ve seen.

 

 

Weak Rupee, Stronger Exports? NEER-REER Say the Story Is Not That Simple

A weaker rupee can help exporters but only if India becomes cheaper relative to competitors, and only if inflation doesn’t wipe out that advantage. That’s where NEER and REER matter.

 

 

 

NEER = Nominal Effective Exchange Rate

 

 

 

This measures how the rupee moves against a basket of major trading partners’ currencies, without adjusting for inflation.

 

• NEER fell to 84.58 in Oct 2025 (from 90.85 a year earlier).
• A fall = rupee weakened against most currencies.

 

​​​​​​​REER = Real Effective Exchange Rate

 

 

This adjusts for inflation differences. It tells us whether India is becoming truly more competitive.

 

 

• REER slipped to 97.47 in Oct 2025, below the usual 100+ range.
• Below 100 = rupee is undervalued in real terms, meaning Indian goods are relatively cheaper.

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This indicates India’s export competitiveness has improved from a currency standpoint.

 

But does this automatically boost exporter profits? Not really.

 

 

For exporters, rupee depreciation is only one piece of the puzzle. The benefit depends on:

 

 

• Global demand: If the world isn’t buying, a cheaper rupee doesn’t help.

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• Import dependence: Many exporters import raw materials priced in dollars so costs rise.

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• Competitor currencies: If China, Vietnam, and Bangladesh also weaken, India gains nothing.

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• Trade barriers: US/EU tariffs can nullify currency advantages.

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How a Weak Rupee Directly Hits Households, Businesses & Investors

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• Fuel costs rise: India imports most of its crude, so a weaker rupee makes petrol, diesel and LPG costlier and higher logistics costs push up food and essentials.

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• Imported goods get expensive: Electronics, pharma raw materials, machinery and other dollar-priced items become costlier, raising both consumer prices and industry input costs.

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• Higher cost of studying or travelling abroad: Tuition fees, flights, hotels and medical treatments overseas become more expensive for Indian families.

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• Corporate pressure: Firms with dollar loans or imported components face higher repayment burdens and squeezed margins.

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• Government strain: A depreciating rupee can increase subsidy needs and external debt servicing, leaving less room for productive spending.

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Investor and market impact:

 

 

Equities: Sectoral Winners and Losers

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• Beneficiaries: Exporters (IT services, pharma, textiles), tourism and hospitality, and some domestic companies with minimal imported input costs benefit as rupee depreciation raises their rupee revenues. For example, IT giants earning in dollars see a direct boost in INR earnings, improving margins.

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• Under Pressure: Import-heavy sectors like electronics, machinery, and chemicals face rising input costs. Companies with high foreign debt exposure (aviation, infrastructure, capital goods) face margin compression. Even some mid-cap and small-cap stocks can experience stress due to currency-linked raw material imports.

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• Investor takeaway: A sectoral rotation is likely export-oriented and currency-hedged companies outperform, while import-heavy and debt-laden firms underperform.

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Fixed Income & Interest Rate Sensitivity

 

• Imported inflation increases the risk of RBI tightening policy or moderating rate cuts. This affects bond yields and prices, particularly for longer-duration government securities and corporate bonds.

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• Higher interest rates make new debt more expensive for corporates, affecting credit spreads and bond market valuations. Investors in floating-rate instruments may benefit slightly, but fixed-rate investors face mark-to-market losses.

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Wealth & Investment Diversification

 

• Positive impact: Indian investors holding overseas assets (US ETFs, ADRs, or foreign mutual funds) see rupee gains on repatriation. Exporters and rupee-hedged global businesses in portfolios may outperform.

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• Negative impact: Domestic-centric portfolios without currency hedges may experience sectoral drag from import-heavy industries. Rising inflation may erode real returns in cash, bonds, and fixed deposits if interest rates lag CPI growth.

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A weaker rupee fuels inflation by making imports costlier. Higher inflation ties RBI’s hands the central bank cannot cut rates and may signal tighter policy to stabilize expectations. As a result, interest rates stay higher for longer, and borrowing costs remain elevated across the economy.

 

 

Disclaimer: The information on this document is provided for information purpose only. It does not constitute any offer, recommendation The views expressed by the Alpha Capital Research are based on current market conditions and information available publicly

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