The currency's 28-paise fall followed its first-ever breach of the 90-per-dollar threshold just a day before, settling market nerves and triggering concerns about imported inflation and broader economic impacts.
Why the Rupee Is in a Downward Spiral
The rupee's accelerated decline is attributed to a combination of domestic uncertainties and global headwinds. Forex traders point to sustained foreign fund outflows and heightened dollar demand from importers as immediate pressures.
Stalled Trade Talks: A primary driver is the protracted delay in finalizing a US-India trade deal. The uncertainty has kept investors on edge, with analysts noting that every day without progress adds to the rupee's weakness.
Foreign Investor Exodus: Foreign Portfolio Investors (FPIs) have been net sellers in Indian markets, pulling out capital amid global risk aversion and shifting trade dynamics.
Restrained Central Bank: Unlike past episodes of volatility, the Reserve Bank of India (RBI) has shown measured intervention, choosing to curb excessive volatility rather than defend a specific level, which has allowed the currency to adjust.
Key Factors Behind the Rupee's Fall
| Factor | Impact on the Rupee |
| India-US Trade Deal Delay | Creates uncertainty, dampens investor sentiment, and stalls export growth. |
| Foreign Portfolio Outflows | Leads to direct selling of rupees for dollars, increasing supply and depressing value. |
| Elevated Import Demand | Companies, especially in oil and gold, stockpile dollars for payments, boosting dollar demand. |
| RBI's Limited Intervention | A strategic decision to allow gradual depreciation prevents a rapid drain on foreign exchange reserves. |
What This Means for the Economy and You
A weaker rupee has a dual-edged impact on the economy. While it makes exports more competitive, benefiting sectors like IT and pharmaceuticals, it significantly increases the cost of imports.
For ordinary citizens, this translates to:
Costlier overseas education and travel, as more rupees are needed for each dollar spent abroad.
Potential rise in prices of imported goods, including electronics, cosmetics, and fuel, which could feed into broader inflation over time.
Despite the record low, government officials have urged calm. Chief Economic Adviser V. Anantha Nageswaran stated the depreciation is not currently hurting exports or inflation and expressed confidence in a future recovery. Experts like Dr. Soumya Kanti Ghosh of SBI Research argue that the rupee's fall is driven by specific policy uncertainties and outflows, not fundamental economic weakness, noting it remains one of the least volatile emerging market currencies.
All Eyes on the RBI and the Road Ahead
The market's immediate focus is on the RBI's monetary policy decision due Friday, December 5. However, experts widely expect the central bank to keep the repo rate unchanged at 5.50%, prioritizing inflation and growth management over direct currency defense.
Former MPC member Ashima Goyal emphasized that the committee's decision will be based on domestic inflation and growth outlooks, not the rupee's level. The central bank is more likely to use its foreign exchange reserves to smooth volatility rather than use interest rates to prop up the currency.
Technical analysts suggest the rupee could test levels near 91 if the current pressures persist, with its future trajectory heavily dependent on the outcome of US-India trade negotiations and a reversal in foreign investment flows. For now, the historic breach of 90 has reshaped market expectations, making a swift rebound unlikely in the near term.
