The Indian rupee has been on a downward trajectory, recently hitting an all-time low of 87.95 against the U.S. dollar. This decline is attributed to a combination of global economic shifts and domestic challenges.
Global Economic Factors
The recent announcement by U.S. President Donald Trump to impose a 25% tariff on all steel and aluminum imports has intensified fears of a global trade war. This policy has strengthened the U.S. dollar as investors seek safer assets, leading to a depreciation of emerging market currencies, including the Indian rupee. Additionally, robust U.S. economic data has bolstered the dollar, further pressuring the rupee.
Domestic Economic Challenges
India is grappling with a widening trade deficit, which expanded by 18.4% year-on-year from April to November. This imbalance is exacerbated by sluggish export growth and rising import costs, particularly in crude oil. The Reserve Bank of India (RBI) has intervened by selling dollars to support the rupee, leading to a $60.5 billion reduction in foreign exchange reserves by year-end. Despite these efforts, the rupee’s depreciation persists, reflecting underlying economic vulnerabilities.
Investor Sentiment and Capital Flows
Foreign investors have withdrawn approximately $11.7 billion from Indian equities in the final quarter, influenced by concerns over potential U.S. trade tariffs and India’s slowing economic growth. This capital flight has intensified pressure on the rupee, as demand for the dollar increases. The RBI’s interventions have aimed to stabilize the currency, but sustained outflows present ongoing challenges.
Central Bank’s Response
In response to the rupee’s decline, the RBI has conducted significant interventions, including an estimated $11 billion in dollar sales, to curb excessive volatility. These measures have provided temporary relief, with the rupee recovering slightly to 86.47 per dollar from its historic low. However, the long-term effectiveness of such interventions remains uncertain, especially amid persistent global and domestic headwinds.
