Topic 3: RUPEE

The Indian rupee weakened sharply against the US dollar in December 2025, extending a year-long depreciation trend and emerging as Asia’s worst-performing major currency, though without signs of a balance-of-payments crisis. The month began with the rupee trading around ₹89.6–89.7 per dollar but quickly slipped under persistent pressure, breaching ₹90 in the first week, touching record lows near ₹90.49 by December 11, and briefly crossing ₹91 in mid-December before stabilising toward the end of the month in the ₹90.8–90.9 range. Overall, the rupee declined by about 2% during December alone and more than 5% on a year-to-date basis, significantly underperforming several Asian peers despite a broadly stable global dollar index. This sharp move reflected a convergence of domestic imbalances and external shocks rather than a single trigger.
A major driver was sustained foreign portfolio investor outflows, with FPIs selling over $1.6 billion of Indian equities and debt during December and cumulative equity outflows exceeding ₹1.48 lakh crore for the year, as investors rotated toward safer dollar assets amid global uncertainty, elevated US yields and concerns over Indian asset valuations. These flows translated directly into higher dollar demand as funds were repatriated, intensifying pressure on both spot and forward currency markets. Trade-related concerns compounded the problem, as stalled US–India trade negotiations and aggressive tariff hikes by the US—reportedly up to 50% on key Indian exports such as textiles, pharmaceuticals and electronics—eroded confidence in India’s external earnings outlook and threatened export competitiveness. These fears came on top of a widening trade deficit, with weak global demand dragging exports lower while imports surged due to higher purchases of gold, crude oil and capital goods, forcing corporates and refiners to front-load dollar buying. Currency market dynamics were further amplified by heavy importer hedging and stress in the offshore non-deliverable forward (NDF) market, which pushed up forward premia and magnified each bout of risk aversion.
Against this backdrop, the Reserve Bank of India adopted a consciously measured approach, intervening selectively to smooth volatility rather than defending any specific level. While the RBI reportedly sold dollars intermittently—drawing down reserves but keeping them at comfortable levels—it allowed the rupee to act as a “shock absorber,” consistent with its growth-supportive stance following a 25-basis-point rate cut and the IMF’s classification of India’s regime as a managed, crawl-like arrangement. This policy tolerance of gradual depreciation helped prevent panic but also meant that external pressures were reflected more fully in the exchange rate.
Market reactions to the weaker rupee were contained rather than disorderly: bond yields firmed slightly as currency risk and current-account concerns lifted term premia, equities faced intermittent foreign selling even as domestic investors provided support, and the real economy confronted near-term headwinds from imported inflation and costlier foreign borrowing. At the same time, some analysts noted that a weaker rupee could partially offset tariff damage by improving export price competitiveness over time. By late December, the breach of the psychologically important ₹90 level was widely interpreted not as a crisis signal but as a policy-tolerated reset driven by trade shocks, capital outflows and global risk aversion, leaving the rupee stabilised but vulnerable heading into 2026 until clarity emerges on tariffs, portfolio flows and global monetary conditions