Rupee Slides on Equity Outflows and US Dollar Demand Ahead of RBI Policy Review
| 2025-06-05
The Indian rupee weakened against the US dollar amid foreign outflows and rate cut expectations ahead of the Reserve Bank of India’s policy review.
The Indian rupee weakens against the US dollar amid equity outflows, narrowing rate differentials, and caution ahead of the Reserve Bank of India's policy decision.
The Indian rupee slipped to 86.02 against the US dollar during intra-day trade on Wednesday, before recovering slightly to close at 85.90 per dollar. The depreciation was driven largely by sustained equity outflows and adjustments in offshore non-deliverable forward (NDF) positions ahead of the Reserve Bank of India’s (RBI) upcoming policy announcement on Friday, according to traders.
The rupee had opened the session at 85.74 per dollar, weakening from its previous close of 85.59 on Tuesday. Market participants cited a combination of factors contributing to the decline, including strong dollar demand from foreign banks and oil companies, in addition to mounting global economic uncertainty.
Currency traders indicated that possible intervention by the RBI helped stem the rupee’s losses, preventing it from breaching the psychologically significant level of 86 per dollar. The local currency has now fallen by 1.5% since last Monday, making it the worst-performing Asian currency over this period, according to financial data provider LSEG.
Rate Differentials Narrowing
Analysts attributed the pressure on the rupee in part to shrinking interest rate differentials between India and the United States. With the US Federal Reserve maintaining a firm stance against near-term rate cuts, expectations of an accommodative move by India’s central bank have unsettled currency markets.
“Interest rate differentials between India and the US are narrowing, and with the US unlikely to ease rates soon, the rupee’s spot rate is weakening,” said Anil Bhansali, Head of Treasury at Finrex Treasury Advisors.
The rupee is now testing new resistance levels, with traders identifying 86.25 per dollar as the next key threshold, having earlier pegged resistance at 85.80 per dollar. There has also been a noticeable unwinding of long rupee positions as market participants hedge against possible policy moves.
“There has been some unwinding of long rupee positions amid tariff uncertainties and ahead of the RBI meeting,” said Kunal Sodhani, Head of Treasury at Shinhan Bank India.
Foreign Investor Outflows Continue
The Indian rupee’s weakness has also been exacerbated by continued foreign portfolio outflows from the equity and bond markets. During the June 3 trading session alone, foreign institutional investors (FIIs) sold shares worth Rs 2,854 crore, while domestic institutional investors (DIIs) purchased Rs 5,908 crore worth of equities.
So far in 2025, foreign investors have remained net sellers, offloading shares valued at Rs 1.27 lakh crore, while domestic funds have cumulatively acquired Rs 2.86 lakh crore, according to market data.
Outflows from the bond market have been particularly notable. Data from the Clearing Corporation of India Limited (CCIL) revealed that foreign investors pulled Rs 25,543.68 crore from Indian government bonds under the Fully Accessible Route (FAR) between April 2 and June 3. This marks the first quarterly outflow since India announced the inclusion of its government bonds in global bond indexes.
Market analysts attribute the withdrawals to the narrowing yield differential between Indian and US 10-year government bonds, diminishing the relative attractiveness of Indian debt.
Policy and Data Awaited
Traders and investors are now awaiting two key events on Friday: the Reserve Bank of India’s Monetary Policy Committee (MPC) review and the release of the United States’ non-farm payroll (NFP) data. The outcome of both is expected to have a significant impact on global interest rate expectations and currency markets.
Currency markets are pricing in a possible 25 basis point rate cut by the RBI in an effort to support growth, which could weigh further on the rupee.
“Forward premia rates have dropped as expectations of an RBI rate cut grow, which in turn pushes up spot rates in the forex market,” a senior currency dealer said.
The US NFP data, which offers a measure of employment and wage growth in the world’s largest economy, will be closely watched to assess the Federal Reserve’s future monetary policy direction. A stronger-than-expected jobs report could harden the Fed’s stance against rate cuts, further complicating matters for emerging market currencies, including the rupee.
Context
The recent volatility in the Indian currency market underscores the delicate balance faced by policymakers in managing inflation and supporting economic recovery, while contending with external factors such as global capital flows and US monetary policy. India’s rupee has historically been sensitive to shifts in global risk sentiment and dollar strength, especially when accompanied by foreign portfolio outflows.
The rupee’s weakness also comes at a time when India is attempting to deepen its integration into global bond markets following its inclusion in widely tracked global bond indexes. While the move is expected to bring long-term benefits by broadening the investor base, short-term volatility is likely as foreign investors adjust their portfolios.
With several emerging markets similarly vulnerable to global monetary tightening cycles, the rupee’s performance over the coming weeks will likely hinge on the RBI’s policy stance and the trajectory of US interest rates.
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