Source: IE
Context:
- The Indian rupee (₹) fell past the psychological 90 mark against the US dollar, hitting an intra-day low of ₹90.29 and settling at ₹90.19, marking a 5.5% depreciation since April 2025.
- The decline coincides with US reciprocal tariffs, high commodity prices, and foreign outflows.
- Foreign Portfolio Investors (FPIs) have pulled out $17.3 billion from the Indian equity market in 2025.
Key Drivers of Depreciation
- Trade and Tariff Pressures:
- High 50% US tariffs on select Indian goods.
- Rising gold and silver prices driving record imports, widening the trade deficit.
- Capital Outflows:
- Net FPI sale of $800 million in the first three days of December.
- Large private equity divestments during marquee IPOs.
- Commodity Imports:
- Expensive fuel, metals, and electronics imports increase external demand for dollars.
- Market Dynamics:
- Offshore bets against the rupee contributed to volatility.
- Divergence observed between equity markets (Sensex > 86,000) and currency depreciation, highlighting structural decoupling of equity inflows and FX movements.
Economic Implications
- Imports costlier: Fuels, electronics, and metals become more expensive, raising inflationary pressures.
- Overseas expenses rise: Education, travel, and medical costs increase.
- Exports and remittances benefit: Depreciation makes Indian exports more competitive and foreign remittances more valuable.
- Current Account Deficit management: Controlled depreciation can help RBI conserve reserves and support trade competitiveness.
Policy and Market Response
- RBI intervention: Limited action to cap sharp fall; rupee managed at ₹90.21.
- Controlled depreciation strategy: Authorities appear to allow the currency to find its equilibrium, prioritizing export competitiveness over short-term stabilization.
- Near-term volatility expected: Clarity on India–US trade talks and commodity price trends will determine the rupee’s trajectory.
