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The Indian rupee breaching the psychologically significant ?90 per US dollar mark marks an important macroeconomic moment. While the depreciation reflects a cumulative build-up of pressures rather than a sudden shock, it has raised concerns about India’s external stability, capital flows, and policy trade-offs.

Drivers of Rupee Depreciation

1. External Sector Pressures: India’s trade deficit is widening, increasing demand for dollars. In October 2025, merchandise exports fell 11.8% year-on-year to about $34 billion, affected by weak global demand and tariff disadvantages in key markets such as the US. At the same time, imports rose sharply, driven by domestic demand and record gold imports, which surged during the festive season. Elevated gold prices amplified the import bill, adding strain to the current account balance.

2. Capital Outflows: Persistent Foreign Portfolio Investor (FPI) outflows have further weakened the rupee. Since early 2025, FPIs have withdrawn large sums from Indian equities, reflecting global portfolio reallocation toward more profitable or safer markets. Such outflows raise demand for dollars and reduce foreign exchange inflows, directly pressuring the currency.

3. India–US Trade Deal Uncertainty: The delay in finalising a bilateral trade agreement with the US has injected uncertainty regarding tariff structures and export competitiveness. Markets often price such uncertainty into currency movements. A weaker rupee can partially offset tariff disadvantages, but prolonged ambiguity dampens investor confidence.

4. Behavioural and Market Factors: Importers have been rushing to hedge by buying dollars, while exporters are delaying conversions in anticipation of better rates. This asymmetry increases short-term dollar demand. Breaching the ?90 level also has a psychological impact, potentially triggering speculative positioning.

Why Depreciation Persists Despite Strong Fundamentals

Paradoxically, India’s macro fundamentals remain relatively strong—robust GDP growth, easing inflation, and moderate crude oil prices. However, exchange rates are influenced not just by domestic conditions but also by global liquidity, risk appetite, and capital flows. In periods of global uncertainty or strong US dollar demand, even sound economies can face currency weakness.

Role of the Reserve Bank of India (RBI)

The RBI appears to be following a “soft-touch” intervention strategy, stepping in primarily to curb excessive volatility rather than defend a specific exchange rate. Active defence would deplete foreign exchange reserves and may only delay adjustment. Allowing gradual depreciation can also support export competitiveness, though it raises concerns about imported inflation and higher input costs for industry.

Implications for the Economy

• Imported Inflation: A weaker rupee makes imports costlier, particularly fuel, electronics, and fertilisers.
• External Balance: Persistent depreciation may widen the current account deficit.
• Export Competitiveness: Some relief for exporters, though structural issues remain.
• Investor Sentiment: Sustained currency weakness can deter foreign investment.

Way Forward

Stability will depend on reviving capital inflows, managing the trade deficit, and reducing gold import dependence. Conclusion of trade agreements, sustained export growth, and calibrated RBI intervention will be crucial. Over the medium term, strengthening manufacturing competitiveness and diversifying export markets remain essential for external resilience.