Rupee Weakness Against US Dollar in 2025: Causes, RBI Role & Perspectives

Rupee Weakness Against US Dollar in 2025: Causes, RBI Role & Perspectives

Introduction

• Current Status (as of Dec 2025): Rupee has depreciated ~5-6% YTD against USD, breaching historic lows (~₹90-91/USD).
• Context: Despite India’s strong growth (fastest major economy), contained inflation, and improving external metrics, rupee is weakening — even as USD weakens against other currencies.
• Key Paradox: Rupee underperforms peers in emerging markets (e.g., China, Japan, UK currencies stronger in some periods).
• Article Focus (Judit Misra, Dec 2025): Trade deficit not sole driver; RBI policies & investor flows play major role.

Key Causes of Rupee Depreciation

• Trade Deficit & External Factors:
  • Widening CAD due to high imports (oil, gold, electronics) > exports.
  • US tariffs (e.g., Trump-era hikes) hit Indian exports → reduced dollar inflows.
  • Global factors: Strong USD (high US rates), rising crude prices.
• Capital Flows:
  • FPI outflows (~$18-29 bn in 2025) — investors prefer US/China equities (overvalued Indian markets?).
  • Net FDI low due to repatriations/outbound investments.
• Relative Performance:
  • Rupee weakens even when USD weakens globally (e.g., vs. Euro, Pound).
  • Emerging markets (China +16-27%, Japan +22-27%, FTSE +18%) outperform India (Sensex +8% in some periods).

RBI Policies & Interventions

• Managed Float Regime: RBI intervenes to curb volatility, not fix levels.
• Spot vs. Forward Interventions:
  • Spot sales deplete reserves (e.g., $20-30 bn net sales in 2025).
  • Forward contracts (short position ~$59-65 bn) more effective — signals without immediate reserve drain.
• BoB Study (Oct 2020-Nov 2025):
  • RBI forward position & FPI flows explain most exchange rate variation.
  • Trade deficit has minimal direct impact on rupee movements.
  • Non-economic factors (e.g., trade deal uncertainty) dominate.
• Recent Actions: Aggressive dollar sales (e.g., $2-3 bn) to halt free fall; swaps/OMOs for liquidity.

Why Rupee Weakens Despite Strong Fundamentals?

• Investor Perception: Indian equities seen as overvalued or low-profit potential vs. peers.
• Policy Shift: RBI tolerates gradual depreciation to rebuild reserves & boost exports.
• Global Context: Strong USD attracts capital; trade uncertainties (US-India deal) deter flows.
• Data Insight (BoB): RBI forward interventions & FPI inflows most significant; trade deficit not a key driver.

Concerns & Implications

• Negative: Higher import costs (oil, electronics) → inflation risk, CAD widening.
• Positive: Boosts export competitiveness (e.g., IT, pharma).
• Broader Impact: Undermines investor confidence; potential fiscal strain if reserves deplete.

Conclusion (UPSC Mains Perspective)

• Rupee’s 2025 weakness highlights structural issues (trade deficit, capital volatility) over pure fundamentals.
• RBI’s forward-focused intervention is effective but signals shift from aggressive defense.
• Way Forward: Resolve trade uncertainties, attract stable FDI, diversify exports, and maintain forex buffers.
• Long-term: Gradual depreciation aligns with growth but requires balanced policy to avoid disorderly moves.