Indian Rupee Hits Historic Low Against US Dollar: Economic Implications

The Indian rupee has recently experienced a significant decline, reaching an unprecedented low of 90.55 against the US dollar. This depreciation is attributed to various factors, including uncertainty regarding trade negotiations between India and the United States and ongoing foreign capital outflows from the Indian equity market.

Current Economic Context

As of late 2025, the rupee has depreciated approximately 6% year-to-date, making it the weakest currency among major Asian economies. Foreign investors have withdrawn roughly $18 billion from Indian equities this year, exacerbating the rupee's decline. Coupled with a record merchandise trade deficit observed in October, these developments signal potential challenges for India's broader economic landscape.

Factors Driving the Decline

Analysts suggest that the rupee's weakness may persist in the near term, particularly due to the unresolved nature of the India-US trade deal. If negotiations do not progress, investor sentiment could remain pessimistic, further impacting capital flows into the Indian market. The Reserve Bank of India (RBI) has intervened in the foreign exchange market, reportedly selling $65 billion between October 2024 and September 2025 to stabilise the currency.

Macroeconomic Channels Affected

The depreciation of the rupee will impact several key macroeconomic variables, including inflation, trade dynamics, corporate margins, and investment decisions.

1. Inflationary Pressures: A weaker rupee typically leads to higher import costs, which can trigger inflation. However, current global commodity prices, particularly for crude oil, have decreased, potentially mitigating severe inflationary effects despite the rupee's depreciation.

2. Trade Balance Dynamics: Historically, a weaker rupee tends to improve the trade balance by making exports more competitive while reducing import demand. Research indicates that a 5% depreciation in the Real Effective Exchange Rate (REER) can lead to a 2.3% reduction in imports, potentially boosting GDP growth. A recent study by Bank of America Securities (BofA) suggests that the current depreciation could save India between $7 billion and $12 billion, improving the trade balance significantly over time.

3. Investment Sentiment: The depreciation may negatively affect business and consumer confidence, particularly if capital outflows continue. Studies have shown that significant currency weakness can correlate with decreased consumer and business sentiment, impacting overall economic activity.

4. External Sector Implications: While the initial impact may be challenging, the long-term effects could enhance competitiveness in the services sector. As Indian services become cheaper for foreign clients, this may stimulate growth in exports.

Future Projections

Looking ahead, much hinges on the resolution of the India-US trade deal and the overall economic growth trajectory. Analysts from BofA predict that if the current trends persist, the rupee could reach around 86 against the US dollar by the end of 2026, contingent upon broader dollar weakness and improvements in market sentiment.

The RBI's management of the rupee, including its interventions in the forex market, will be crucial in navigating these turbulent waters. While the bank's reserves remain sufficient, ongoing capital outflows may challenge the sustainability of its operations.

In summary, the Indian rupee's decline to historic lows poses a complex array of challenges and opportunities for the Indian economy. Stakeholders will need to carefully monitor developments in trade negotiations and external economic conditions to mitigate potential adverse effects while capitalising on any emerging growth prospects.