The Indian rupee registered its largest annual fall in three years, weighed down by record equity outflows and the lack of a US trade deal that left it out of the rally across Asia, with prospects for a recovery tied to the trade pact. The currency has repeatedly fallen to record lows during the year, slipping past the 91 level at one point, highlighting the sustained depreciation pressure.
“The rupee’s performance this year was largely a capital-flow story, with the RBI adopting a more pragmatic and flexible approach to the exchange rate and allowing the currency to weaken,” said Gaura Sen Gupta, an economist at IDFC First Bank. India’s balance of payments slipped into a roughly $22 billion deficit between April and November, the largest historically, indicating the external strains facing the economy, he added. Economists believe a trade deal with the US could offer temporary relief, potentially lifting the rupee to about 88.50 by March, before underlying pressures reassert themselves and the currency weakens again.
But will it become a political issue? Recall the end of the Congress-led UPA’s second term when the falling rupee touched the 69 level and provided a political handle to Narendra Modi, then chief minister of Gujarat and the BJP’s poll committee chairman. “Look at how fast the rupee is falling. Sometimes, it seems there is a competition going on between the rupee and the government in Delhi on whose dignity goes down faster. The rupee has fallen rapidly in the past three months. But the government has not taken any steps in the last three months to strengthen the rupee against the dollar. If the rupee keeps falling like this, other countries will start taking advantage of India,” he had said.
Terming the leadership as directionless, the PM-aspirant had then added: “The country might have never imagined that it would face such an economic crisis. But when leadership during such a crisis is directionless, then hopelessness increases. The Centre has not taken any step to instil confidence among people.”
The Congress has now targeted Modi over the rupee’s downward slide and recalled his 2013 remarks on the issue. It pointed out that the rupee had closed at 58.58 in 2014, when Manmohan Singh handed over the reins of power to Modi.
The Opposition believes that, while the falling rupee may now help exporters and remittance recipients, it will sooner than later start affecting the general public. India imports 87 per cent of its crude and 60 per cent of its edible oil. The fall may soon start impacting household budgets. Students going abroad for education may start feeling the pinch, as will tourists. Imported items – laptops, fridges, smartphones – will now come with a higher price tag. “If the rupee hits the 100 level, we will have a solid stick to beat the government with,” says a Congress leader.
Big issue, little gain
The rupee’s rough patch stands in marked contrast to its rout in 2022, when aggressive rate hikes by the US Federal Reserve fuelled a broad rally in the dollar. The Congress had made a big issue of it then, but no major political gain materialised. Political analysts believe that the rupee’s fall by itself cannot be a major political issue, but can certainly add to the anti-incumbency atmosphere.
Most economists believe that the rupee’s underperformance relative to its peers was largely a function of heavy equity outflows and slowing capital inflows elsewhere
Most economists believe that the rupee’s underperformance relative to its peers was largely a function of heavy equity outflows and slowing capital inflows elsewhere. Foreign investors withdrew a record $18 billion from Indian equities in 2025, while debt, external commercial borrowing and foreign direct investment flows were subdued. Prolonged negotiations with the US further compounded the capital flow challenge by reducing predictability around India’s trade outlook. Uncertainties relating to the US policies dulled the appetite for the rupee, setting it apart from Asian peers that faced less tariff-related pressure.
Banking circles comment on the Reserve Bank of India’s approach to rupee swings, which saw a change after Sanjay Malhotra became governor in December 2024. Under Malhotra, the RBI has become more tolerant of currency weakness, with its market interventions primarily aimed at managing depreciation expectations and countering the build-up of one-sided speculative positions.
This change was most evident in mid-December, when the rupee fell past the 91-per-dollar mark for the first time. The RBI intervened heavily to rein in speculative pressures, while not defending a specific level, bankers observed.
The rupee’s decline in 2025 alongside the rally in other currencies means the rupee is no longer overvalued. India’s 40-currency trade-weighted real effective exchange rate declined to 97.5 in November from 104.7 in January 2025, according to the central bank data. A reading above 100 indicates that a currency is overvalued, while a level below 100 suggests it is undervalued.