Why in news?

India’s rupee fell below the crucial ₹90-per-dollar mark, unsettling financial markets and raising broader macroeconomic concerns. The currency has now weakened over 5% this year.

Analysts say the rupee’s movement reflects both domestic and global pressures, including a strong US dollar and delays in the first tranche of the India–US trade agreement.

What’s in Today’s Article?

• Rupee Breaches the 90-Per-Dollar Mark
• India’s Trade Deficit Shows Signs of Widening
• Uncertainty Over India–US Trade Deal Adds Pressure on the Rupee
• Foreign Investors Continue to Pull Out of Indian Markets
• RBI Allowing the Rupee to Weaken

Rupee Breaches the 90-Per-Dollar Mark

• The rupee slipped below the psychologically crucial ₹90-per-dollar level, unsettling markets and intensifying concerns over India’s macroeconomic outlook.
  • The ₹90 mark is a critical psychological threshold for the rupee. Once breached, it can trigger buy-stop orders and fuel sharper depreciation, pushing the currency toward ₹91 or beyond.
• The currency has fallen over 5% this year, and the breach reflects a cumulative build-up of pressures, not a single shock.
• Strong Domestic Fundamentals Haven’t Stopped the Slide
  • India’s macro indicators appear supportive:
    • Crude oil prices have eased
    • Inflation has dropped below 1%
    • GDP growth hit 8.2% in Q2
  • Yet the rupee continues to face sustained downward pressure, revealing a disconnect between strong domestic fundamentals and the currency trend.
• Foreign Outflows and Trade Deal Uncertainty Weigh on Sentiment
  • Persistent foreign portfolio investor (FPI) outflows, driven by profit booking and shifts to other markets, have drained liquidity and raised demand for the US dollar.
  • Meanwhile, delays in concluding the India–US trade deal have heightened uncertainty about future trade flows, tariff competitiveness, and the balance-of-payments outlook, dampening market confidence.
  • Exports remain under pressure, while a surge in gold imports during the festive season has amplified dollar demand.

India’s Trade Deficit Shows Signs of Widening

• India’s external sector is under growing pressure as early indicators point to a widening trade deficit — a situation where imports exceed exports, increasing demand for dollars and weakening the rupee.
• India’s merchandise exports fell 11.8% year-on-year in October 2025, dropping to an 11-month low of $34.4 billion. The decline was driven by:
  • Lower shipments to the US, a major export market
  • Higher US tariffs
  • A high base from strong export growth in 2024
• In contrast, imports surged 16.6% year-on-year to a record $76.1 billion in October 2025.
• Why the Trade Gap Is Widening?
  • The widening deficit is being shaped by:
    • Softening demand from major export markets
    • Strong domestic demand for imported goods
    • Unfavourable tariff conditions, especially with the US
    • Weak export competitiveness across major sectors
• Gold’s Role in Widening the Trade Deficit
• The biggest contributor was gold imports, which tripled to $14.7 billion amid festive-season demand.
• Surging gold prices and massive import volumes have become a key force shaping India’s trade dynamics.
• They have intensified pressure on the rupee, contributed to a widening trade deficit, and added stress to the overall balance of payments outlook.
• Implications for the Rupee and Economy
  • If these trends continue, India’s trade deficit is likely to worsen, putting additional pressure on the rupee, widening the balance-of-payments gap, and intensifying broader macroeconomic challenges.

Uncertainty Over India–US Trade Deal Adds Pressure on the Rupee

• Markets are increasingly worried as the long-awaited India–US trade agreement remains unresolved.
• Without a deal, analysts say, the rupee may act as a “pressure valve,” gradually weakening to offset tariff disadvantages faced by Indian exporters.
• Until a clear announcement is made, markets are likely to price in the uncertainty—with the rupee reflecting it most visibly.

Foreign Investors Continue to Pull Out of Indian Markets

• India’s equity markets have underperformed for over a year, prompting foreign portfolio investors (FPIs) to steadily withdraw funds.
• Since January 2025, FPIs have pulled out ₹1.48 lakh crore, exerting consistent downward pressure on the rupee.
• Why FPIs Are Selling Despite Strong Macro Indicators?
  • Although India’s macroeconomic backdrop appears stable, stock market performance tells a different story.
  • Over the past year, India has been one of the weakest performers among major global markets.
  • Despite occasional record highs, returns have significantly lagged those in faster-growing international markets.
  • As a result, investors have increasingly treated India as a liquidity source, redirecting capital to more profitable regions.

RBI Allowing the Rupee to Weaken

• There is growing debate over whether the RBI is intentionally letting the rupee depreciate.
• Many economists argue the central bank is not pushing the rupee down, but simply responding to global shifts and India’s current macroeconomic dynamics.
• They note that RBI has been selling dollars only to curb volatility, not to target a specific exchange rate.
• Behavioural Factors Driving Sentiment
  • According to experts:
    • Importers are buying dollars aggressively
    • Exporters are holding back, waiting for better rates
    • The dollar index is below 100, which should normally support the rupee
  • They note that RBI’s relative silence, combined with IMF criticism of the rupee’s movement, is fueling negative sentiment.
• RBI’s Soft-Touch Strategy
  • RBI appears to be conserving firepower:
    • Its forward book is already substantially drawn down, including in offshore NDF markets
    • It is using a measured approach, intervening only to prevent disorderly volatility, not to defend a specific level
  • This suggests a deliberate balancing act:
    • Allowing the rupee to find its market-determined level, while remaining poised to step in if the slide becomes excessively disruptive.