Why is the Indian Rupee Crashing Against the US Dollar? Understanding the Factors Behind the Recent Decline
India’s rupee faced significant pressure against the US dollar in early 2025. On Monday, the rupee dropped to an all-time low of 86.65. It narrowly avoided hitting a lifetime low again later in the week, prompting concern among investors and policymakers alike. But what's driving this decline? This article delves into the key reasons behind the rupee's depreciation and what it means for the Indian economy.
Global Economic Headwinds
A major factor contributing to the rupee's weakness is the strength of the US dollar. The dollar has been appreciating against most major currencies, driven by aggressive interest rate hikes by the Federal Reserve to combat inflation. This makes the dollar more attractive to investors, leading to increased demand and a stronger exchange rate.
Impact of Rising Crude Oil Prices
India is heavily reliant on crude oil imports. Rising global oil prices put pressure on the rupee as it increases the import bill, widening the current account deficit. This increased demand for dollars to pay for oil imports further weakens the rupee.
Foreign Portfolio Outflows
Foreign portfolio investors (FPIs) have been pulling money out of Indian markets due to global uncertainty and attractive investment opportunities in the US. This outflow of dollars puts downward pressure on the rupee.
Geopolitical Tensions
Uncertainty in the global geopolitical landscape, including ongoing conflicts and trade tensions, can also negatively impact the rupee. Investors often seek safe-haven assets like the US dollar during times of geopolitical instability.
The Role of the Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) intervenes in the foreign exchange market to manage the rupee's volatility. However, excessive intervention can deplete the country's foreign exchange reserves. In an attempt to reduce reliance on the US dollar and to internationalise the Indian rupee, the Reserve Bank of India (RBI) allowed invoicing and payments for international trade in rupees. This move aims to promote the rupee as a viable alternative currency for international transactions. However, its impact on the immediate decline is limited and longer-term.
Inflation and Interest Rate Differentials
A higher inflation rate in India compared to the US can also contribute to the rupee's depreciation. Additionally, the difference in interest rates between the two countries plays a role. If US interest rates are significantly higher, it can attract capital away from India, putting pressure on the rupee.
What's Next for the Indian Rupee?
The future trajectory of the Indian rupee depends on a complex interplay of global and domestic factors. Monitoring global economic conditions, government policies, and RBI interventions will be crucial in understanding the rupee's future direction. While the current situation presents challenges, the Indian economy remains resilient, and efforts to strengthen the rupee and promote its internationalization are ongoing.