The Indian Rupee’s Depreciation Against the US Dollar: Current Realities and Strategic Implications

The journey of the Indian Rupee (INR) against the US Dollar (USD) has long fascinated economists, investors, and citizens alike. As of late 2025, the rupee is trading near historic lows, sparking widespread debate over the forces driving this trend and its economic consequences. This blog aims to break down the core reasons for INR’s depreciation, examine macroeconomic repercussions, assess the Reserve Bank of India’s (RBI) interventions, and discuss strategic takeaways for stakeholders.

 

 

I. Current Status and Recent Movements

The INR hit a historical low at ₹89.76 per USD on 21^st November, 2025. The RBI has responded with a mix of interventions to moderate extreme swings and preserve investor confidence.  However, the currency remains under pressure, reflecting structural challenges in trade and investment flows.

II. Core Drivers of Rupee Weakness

A. Structural Determinants

• Persistent Current Account Deficit (CAD): India’s tendency to run consistent trade deficits creates sustained demand for dollars, structurally pressuring the INR lower.
• Dependence on Oil Imports: India imports most of its oil, so higher global oil prices widen the trade deficit and CAD, requiring more dollars.
• Significant increase in gold imports: Heavy gold imports have been one of the key reasons for the ballooning of India’s trade deficit.  In October 2025 alone gold imports were up 200% on back of festival season demand.
• Inflation Differentials: Domestic inflation rates in India are persistently higher than those in the US, eroding the rupee’s purchasing power and necessitating gradual depreciation vis-à-vis the dollar, to maintain PPP.

B. Cyclical and Global Headwinds

• Foreign Institutional Investor (FII) Outflows: In 2025, net outflows by FPIs were Rs 1.43 lakh crore.
• US Tariffs and Visa Fees: Recent US policies have included a 50% tariff hike on Indian imports and higher H1B visa fees.

III. Macroeconomic Repercussions

A. Negative Impacts

• External Debt Burden: Currency depreciation turns foreign debt costlier. A one-rupee drop raises the external debt-to-GDP ratio by 0.75% short-term and 1.26% long-term.
• Inflation Impact: The price of crude oil, consumer goods, and electronics rises with each rupee depreciation, lifting inflation and eroding household wallets.
• Costlier Overseas Expenses: Indian families and students pay more for foreign education, travel, and imported consumer products.
• Reduced Investor Confidence: Weakening currency may trigger capital flight and dampen Foreign Direct Investment (FDI) inflows.
• Steeper Corporate Debt Repayment: Corporate borrowers face increased costs repaying dollar-denominated debt.

B. Positive Impacts

• Export Boost: Export-oriented sectors especially IT and Pharmaceuticals, stand to gain as Indian goods become more affordable globally.
• Remittance Benefits: For expatriates and their families, each dollar sent home becomes more valuable, bolstering the domestic economy.
• Tourism: Attracts more foreign tourists as India becomes a cheaper destination.

Local Manufacturing Boost: Encourages domestic production by making imported substitutes more expensive.

 

IV. RBI Policy and Strategic Dilemma

The RBI maintains a market-determined exchange rate but steps in to suppress sharp volatility. While this reduces short-term instability, it can keep the rupee overvalued by Real Effective Exchange Rate (REER) standards, discouraging exports and perpetuating the trade deficit.

Dilemmas:

• Overvaluation: The intervention has kept the rupee above its nominal equilibrium, harming exporters’ interests.
• Moral Hazard: Suppressed volatility may tempt companies to take unhedged dollar loans, assuming RBI protection.
• Crisis Risk: Persistent intervention risks a speculative reserve run and sudden depreciation.

Experts suggest that allowing greater currency flexibility could ease pressure on reserves, encourage sound corporate hedging, and sustainably align the rupee with its fundamentals.

 

V. Outlook and Forecasts

At Right Horizons, we see the current rupee weakness as a cyclical correction within a long-term growth story. We expect it to hover around ₹87–90 through Q4 2025 and stabilize by early/mid-2026 as the Fed cuts rates and capital flows realign.

With economic and earnings momentum picking up, we expect the rupee to strengthen alongside rising FPI inflows and equity outperformance in the medium term. When sentiment is at its lowest, it offers the best entry points

Conclusion

Trade imbalances, global pressures, and domestic macro fundamentals shape the Indian Rupee’s structural weakness. Although RBI intervention has shielded the currency from volatility, it has come at the expense of long-term export competitiveness and greater crisis risk. However, we expect a stabilisation and also appreciation of the rupee in the medium to long term.  Stakeholders must remain agile, manage currency exposures, and diversify their strategies for a rapidly changing global financial landscape.