The Indian rupee (INR) has faced significant depreciation in 2025, losing approximately 3.1% against the US dollar as of October 28. This decline occurs even when the dollar itself has weakened against other major currencies. Notably, the rupee has depreciated by 15% against the euro, 9% against the British pound, and 6% against the Japanese yen. This article delves into the reasons behind the rupee’s decline and its implications for various stakeholders.
### Understanding the Context
A falling rupee often signals economic weakness; however, India’s macroeconomic indicators reveal otherwise. India’s GDP grew by 7.8% in the April–June quarter, with projections suggesting a full-year growth rate of around 6.5%. Additionally, inflation rates remain well below the Reserve Bank of India’s (RBI) target of 4%, and the current account deficit stands at a manageable 1% of GDP. Coupled with a robust $700 billion in foreign exchange reserves—enough to cover 11 months of imports—and a modest external debt load of under 19% of GDP, one might expect the rupee to remain stable.
### Capital Outflows: The Real Issue
The primary reason for the rupee’s decline is less about economic fundamentals and more about shifts in global capital flows and investor sentiment. While India typically attracts substantial foreign investment due to its growth trajectory, net capital inflows have dropped dramatically in 2025. For instance, as of June 30, the net capital inflow for the year was a meager $2.25 billion, or just 0.1% of GDP. This marks a significant downturn compared to usual inflows ranging from 2% to 2.5% of GDP annually.
A critical component of this decline is the drop in foreign equity capital inflows, which include both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Net FDI inflows have decreased sharply over the last three years, plummeting from $40-45 billion annually between FY20-22 to just $1 billion in FY25. Furthermore, foreign portfolio investors have withdrawn approximately $16 billion from Indian stock markets from the start of 2025 until late October.
Capital flows are inherently volatile and can overshadow fundamental economic indicators in the short term, contributing significantly to the rupee’s depreciation in 2025.
### Global Factors at Play
Geopolitical uncertainties and trade tensions further exacerbate the situation. Following changes in US trade policies under President Trump, India anticipated favorable treatment in trade relations. However, it now finds itself facing high tariffs, often as steep as 50%. Compounding these issues are modifications to H1B visa regulations and proposed legislation like the HIRE Act, which could negatively impact trade relations with the US. Such strained relations have shaken market confidence, contributing to the rupee’s decline.
### The RBI’s Role
Amid this turmoil, the Reserve Bank of India has taken a relatively hands-off approach, allowing market dynamics to influence the rupee’s valuation. Between April and August, the RBI’s interventions in the foreign exchange market averaged around $11 billion monthly, substantially lower than the $63 billion monthly average seen in FY25. However, the central bank maintains significant foreign exchange reserves, which gives it the capacity to stabilize the rupee against any sudden external shocks.
### A Necessary Valuation Correction
It is crucial to recognize that the rupee’s decline may also be part of a necessary valuation correction. Historically, the rupee has maintained a stronger position than many other emerging-market currencies, buoyed by investor confidence in India’s growth potential. However, this led to an overvaluation concerning its peers. Currently, the 40-currency Real Effective Exchange Rate (REER) reveals that the rupee is undervalued by roughly 4%. In essence, while the rupee may have overshot its depreciation, this creates an opportunity for stabilization or even recovery as global conditions improve.
### Implications for the Future
The ongoing depreciation of the rupee does not reflect a failure of India’s economic fundamentals but instead highlights the complexities of global economic interactions. For individuals and businesses, the implications of a declining rupee are multifaceted. Importers may face increased costs for foreign goods, while exporters could benefit from a competitive edge internationally.
For retail investors, the current climate presents a mixed bag of opportunities and challenges. Those looking to invest in foreign assets may find this an opportune moment to diversify. Conversely, domestic investors should remain vigilant about potential inflationary pressures that could arise from a weaker rupee.
In summary, while the rupee’s slide in 2025 is concerning, it must be viewed within a broader global context. With strong fundamentals underpinning the economy and the RBI’s readiness to manage volatility, the situation may stabilize in the coming months, especially if trade relations with the US improve.
### Conclusion
In conclusion, the depreciation of the Indian rupee is a reflection of a complex tapestry of factors rather than an indictment of India’s economic strength. As geopolitical tensions and global capital flows evolve, the rupee’s future will likely depend on both domestic and international developments. Investors, businesses, and consumers alike should keep these dynamics in mind as they navigate the current economic landscape, remaining cognizant of both risks and opportunities that lie ahead.
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