Rupee Hits Record Low of 90.43 Against Dollar: Fastest Rs 5 Decline in Under a Year

The Indian rupee continued its relentless slide on Thursday, plunging to a record low of 90.43 against the US dollar in early trade. This marks a historic breach of the psychologically significant 90-level barrier, representing the currency's fastest Rs 5 decline (from 85 to 90) in under a year, despite persistent interventions by the Reserve Bank of India to stabilize the exchange rate.

Rapid Depreciation Timeline

The rupee's recent trajectory tells a story of accelerating weakness:

• Wednesday: Crossed the 90-level barrier for the first time, reaching an intra-day low of 90.29 before closing at 90.19
• Thursday: Further weakened to 90.43 in early trade, setting a new record low
• Since April 2: Depreciated by 5.5% following Trump's reciprocal tariff announcement
• Recent trend: Fastest Rs 5 decline (85 to 90) in less than 12 months according to SBI research

Key Drivers of Rupee Weakness

According to analysis by the SBI research team, multiple factors are converging to pressure the Indian currency:

1. Foreign Portfolio Investment Withdrawals

Foreign portfolio investors (FPIs) have withdrawn more than $17 billion from Indian markets this year. This sustained outflow represents one of the largest capital exits in recent years and creates persistent dollar demand, weakening the rupee.

2. Private Equity Exit Through IPOs

Private equity firms have been cashing out their investments through substantial initial public offerings from prominent startups. While IPOs themselves occur in rupees, the subsequent repatriation of profits by foreign PE investors contributes to capital outflows and dollar demand.

3. Substantial Trade Deficits

India continues to run significant trade deficits driven by high-cost imports across multiple categories:

• Crude oil: Persistent energy import requirements
• Metals: Industrial metal imports for manufacturing
• Electronics: Growing demand for consumer electronics and components
• Gold and silver: Unprecedented precious metal imports in October due to elevated prices

The October trade deficit reached unprecedented levels, exacerbated by record gold and silver imports as prices surged globally.

4. Strong US Dollar

The US dollar has maintained strength against most global currencies, not just the rupee. Dollar strength reflects:

• Higher US interest rates relative to other economies
• Safe-haven demand amid global uncertainties
• Robust US economic performance
• Expectations of sustained Federal Reserve hawkishness

5. Trump Tariff Announcement Impact

Since April 2, when former President Trump announced reciprocal tariffs, the rupee has depreciated by 5.5%. The tariff threats have:

• Created uncertainty about India-US trade relations
• Raised concerns about export competitiveness
• Contributed to risk-off sentiment toward emerging markets
• Potentially impacted India's current account dynamics

RBI Interventions Prove Insufficient

Despite aggressive interventions by the Reserve Bank of India to stabilize the currency, the rupee has declined from 85 to 90 in under a year—the fastest such decline on record. The RBI's toolkit includes:

• Direct dollar sales: Selling forex reserves to meet dollar demand
• Forward market operations: Managing currency expectations
• Verbal interventions: Guidance to market participants
• Regulatory measures: Managing capital flow volatility

However, the scale of external pressures has overwhelmed these intervention efforts, highlighting the limits of central bank influence when fundamental factors remain adverse.

Government's Optimistic Stance

Despite the rupee's precipitous decline, the government maintains a sanguine outlook on currency movements.

Chief Economic Adviser's Perspective

V Anantha Nageswaran, India's Chief Economic Adviser, stated that the government "is not losing sleep" over the rupee's decline, suggesting that policymakers view the depreciation as manageable or even potentially beneficial in certain contexts.

Expectations for Recovery

Nageswaran anticipated improvement in the currency's value next year, suggesting that current pressures may be temporary or cyclical rather than structural.

Foreign Direct Investment Optimism

Regarding foreign direct investment, the Chief Economic Adviser expressed optimism, stating: "We may cross $100 billion this year." This projection suggests confidence that long-term capital inflows will support the economy despite portfolio investment volatility.

Economic Implications of Rupee Depreciation

Negative Impacts

1. Higher Import Costs

Currency depreciation increases the rupee cost of imports across all sectors:

• Petroleum products: Higher fuel prices feeding into transportation and production costs
• Consumer electronics: More expensive phones, computers, and appliances
• Industrial inputs: Costlier raw materials and components
• Pharmaceuticals: Higher costs for imported active pharmaceutical ingredients

2. Inflationary Pressures

Import cost increases translate into broader inflationary pressures as:

• Energy costs rise across the economy
• Manufacturers pass through higher input costs
• Consumer prices increase for imported goods
• Services tied to imported inputs become more expensive

3. Higher Expenses for International Activities

Individuals and businesses face increased costs for:

• International education: Foreign university fees, living expenses
• Overseas healthcare: Medical treatments abroad
• International tourism: Travel, accommodation, expenses abroad
• Foreign debt servicing: Higher rupee equivalent of dollar-denominated debt payments

Positive Impacts

1. Overseas Remittances

Indians working abroad benefit from stronger dollar as their remittances convert to more rupees, supporting:

• Family incomes dependent on overseas earnings
• Real estate purchases funded by foreign income
• Consumption in remittance-dependent regions

2. Export Competitiveness

A weaker rupee makes Indian exports more competitive internationally:

• Software services become relatively cheaper for foreign clients
• Manufacturing exports gain price advantage
• Tourism to India becomes more affordable for foreigners
• Pharma and chemical exports more competitive

This export boost proves particularly beneficial as the economy confronts substantial 50% US tariffs on certain products, with currency depreciation partially offsetting the tariff impact.

3. IT Services Sector Windfall

India's massive IT services sector benefits significantly as:

• Dollar revenues convert to more rupees
• Profit margins expand without operational changes
• Share valuations in dollar terms remain attractive
• Competitiveness versus other outsourcing destinations improves

Expert Perspective: Controlled Depreciation Strategy

Market experts suggest that while currency depreciation risks importing inflation, a regulated decline addresses multiple challenges for the central bank simultaneously.

Benefits of Managed Depreciation

• Enhanced share values in dollar terms: Makes Indian equities attractive to foreign investors
• Current account deficit management: Improves export-import balance over time
• Preservation of forex reserves: Allows gradual adjustment rather than depleting reserves defending arbitrary levels
• Competitiveness maintenance: Ensures Indian products remain competitive globally

This perspective suggests that RBI may be deliberately allowing gradual depreciation rather than aggressively defending specific levels, accepting short-term pain for longer-term structural benefits.

Comparison with Other Emerging Markets

The rupee's weakness should be contextualized within broader emerging market currency trends:

• Many emerging market currencies have weakened against the strong dollar
• India's depreciation, while significant, aligns with regional patterns
• Controlled decline differs from crisis-level devaluations seen in some countries
• India's forex reserves remain substantial despite interventions

Historical Context and Future Outlook

Long-term Trend

The rupee has experienced long-term depreciation against the dollar:

• Structural trade deficits requiring continuous adjustment
• Inflation differential between India and US
• Capital account volatility from portfolio flows
• Periodic external shocks requiring currency adjustment

Near-term Factors to Watch

• US Federal Reserve policy: Interest rate trajectory affecting dollar strength
• India's current account: Trade balance and service export performance
• FPI flows: Whether portfolio investors return to Indian markets
• Oil prices: Impact on import bill and trade deficit
• RBI intervention capacity: Forex reserve adequacy for market management
• Trade policy developments: Resolution or escalation of US tariff issues

Investment and Business Implications

For Importers

• Consider hedging dollar exposure through forward contracts
• Explore alternative sourcing to reduce import dependence
• Pass through costs to consumers where market allows
• Optimize inventory timing based on currency expectations

For Exporters

• Capitalize on improved competitiveness
• Consider locking in favorable rates through forward contracts
• Accelerate collection of dollar receivables
• Invest in capacity expansion to serve growing export demand

For Investors

• IT services and export-oriented companies benefit from rupee weakness
• Import-dependent sectors face margin pressure
• Dollar-earning companies see translation gains
• Foreign investors experience reduced rupee returns when converted to dollars

Policy Response Options

The government and RBI have several policy tools to address rupee weakness:

Monetary Policy

• Interest rate increases to attract capital inflows (though constrained by growth considerations)
• Continued forex market intervention using reserves
• Regulatory measures to encourage capital inflows

Fiscal and Structural Measures

• Policies to boost exports and reduce import intensity
• Incentives for FDI and long-term capital
• Trade agreements to diversify export markets
• Energy security initiatives to reduce oil import dependence

Conclusion

The rupee's slide to 90.43 against the dollar represents a significant milestone, marking the fastest Rs 5 depreciation in under a year despite RBI interventions. The decline reflects multiple converging pressures: $17 billion in FPI withdrawals, substantial trade deficits, strong dollar dynamics, and tariff-related uncertainties.

While the government maintains that it's "not losing sleep" over the decline and anticipates currency improvement next year, the immediate impacts are tangible—higher import costs, inflationary pressures, and increased expenses for international activities offset by benefits for exporters, remittance recipients, and the IT services sector.

Experts suggest that a managed depreciation strategy may actually serve the RBI's broader objectives, improving export competitiveness while preserving forex reserves. However, the pace and extent of further decline will depend critically on FPI flow recovery, trade balance improvement, and resolution of US tariff uncertainties.

As the rupee navigates these choppy waters, businesses must adapt through hedging strategies, while investors should recognize both the challenges and opportunities created by currency movements. The government's optimism about $100 billion in FDI and currency recovery next year offers hope, but near-term volatility appears likely as markets digest ongoing external pressures.

Disclaimer: The views and investment tips expressed in this article are for informational purposes only and do not represent financial advice. The views expressed are those of the sources cited and not necessarily those of this website or its management. Investing in equities or other financial instruments carries the risk of financial loss. Readers must exercise due caution and conduct their own research before making any investment decisions. We are not liable for any losses incurred as a result of decisions made based on this article. Please consult a qualified financial advisor before making any investment.

Read More