The Indian rupee recently fell to an all-time low of 87.29 against the US dollar on February 3, 2025. This sharp decline comes amidst growing fears of a global trade war fueled by US-imposed tariffs on imports from Canada, Mexico, and China. The dollar index surged over 1%, reflecting the US dollar’s strengthening against a basket of global currencies.

Key Factors Behind the Rupee’s Decline

The rupee’s depreciation is the result of multiple interconnected factors:

• Global Trade Tensions: The imposition of tariffs by the US has sparked concerns about an escalating global trade conflict.
• Strong US Dollar: Robust US jobs data and expectations of higher interest rates have bolstered the dollar’s value.
• Rising Treasury Yields: Higher treasury yields have made dollar investments more attractive, increasing demand for the currency.

Role of Foreign Institutional Investors and Trade Deficit

Foreign institutional investors (FIIs) have played a significant role in the rupee’s decline. In the third quarter of FY25, FIIs sold approximately $11 billion worth of Indian equities, contributing to capital outflows.

Additionally, India’s trade deficit, which widened to $188 billion, has added further pressure on the rupee. The growing imbalance between imports and exports highlights structural economic challenges.

Consequences of a Weaker Rupee

The weakening rupee has both positive and negative effects on the Indian economy:

Negative Impacts:

• Higher Import Costs: Rising import costs, particularly for crude oil, could increase inflation.
• Foreign Debt Pressures: Companies with foreign debt face higher repayment costs, potentially reducing investments.
• Reduced Consumer Spending: Declining purchasing power may weaken consumer sentiment.

Positive Impacts:

• Boost to Exports: A depreciated rupee makes Indian exports more competitive, benefiting sectors like IT and pharmaceuticals.
• Increased Remittances: Indians working abroad can send more valuable remittances back home, aiding the economy.

The Reserve Bank of India’s Challenge

The Reserve Bank of India (RBI) is navigating a delicate balance between growth, inflation control, and currency stability. While the RBI supports a free-floating currency in principle, ongoing depreciation poses significant challenges. Some analysts believe the RBI may consider a rate cut to ease economic pressures if the rupee remains under strain.

Future Outlook

The future of the rupee remains uncertain, with analysts warning that further depreciation could jeopardize economic stability. The RBI’s upcoming monetary policy meeting will be critical in shaping the rupee’s trajectory and addressing broader economic concerns.