The Indian rupee plummeted to a record low on Wednesday, driven by a combination of bearish market sentiment, speculation over a potential Reserve Bank of India (RBI) rate cut, and stop-loss triggers that accelerated the currency’s decline. The rupee weakened to 87.4875 against the U.S. dollar before settling at 87.4650, marking a 0.4% drop for the day.
This latest decline underscores the pressure on the Indian currency, which has now fallen more than 2% in 2025, making it the worst-performing major currency in Asia. Factors contributing to this downturn include persistent foreign capital outflows, concerns over U.S. trade tariffs, and growing expectations of domestic interest rate cuts.
Key Drivers Behind the Rupee’s Decline
1. Speculation Over RBI Rate Cut
One of the primary drivers behind the rupee’s weakness is the anticipation of an interest rate cut by the Reserve Bank of India during its upcoming monetary policy meeting scheduled for Friday. Market participants are largely pricing in a 25-basis point (bp) cut, reflecting the central bank’s shift in focus from inflation control to supporting economic growth amid global uncertainties.
Nomura, a leading global financial services group, noted in a research report:
“While we believe the RBI has become more tolerant of FX depreciation, its focus has shifted towards supporting growth. However, given the fluid global backdrop, the RBI may err on the side of caution.”
Although Nomura expects a 25-bp reduction, the brokerage suggested that the chances of a larger-than-expected (dovish) rate cut or a significant shift in policy stance remain low. Nonetheless, the mere possibility of easier monetary policy has weakened the rupee, as lower interest rates typically reduce the yield advantage of holding Indian assets, making them less attractive to foreign investors.
2. Stop-Loss Triggers and Panic Buying
The rupee’s sharp afternoon decline was exacerbated by stop-loss triggers. Traders, especially those who had bet on the rupee stabilizing, were forced to liquidate positions when the currency breached key levels, accelerating its fall.
A trader at a private bank commented, “Since its (USD/INR) rise above 87, there is some panic buying happening from importers.”
Stop-loss orders are designed to limit an investor’s loss on a position, but when triggered in large numbers, they can create a snowball effect, driving the price even further in the same direction. This phenomenon was evident in Wednesday’s trading session, where the rupee’s fall gathered momentum once key technical levels were breached.
3. Persistent Foreign Outflows and Global Trade Tensions
The rupee’s depreciation is also being fueled by sustained foreign capital outflows from Indian markets. Foreign institutional investors (FIIs) have been net sellers of Indian equities and bonds in recent months, drawn by higher yields in developed markets like the United States.
Additionally, global trade tensions have added to the rupee’s woes. The rupee weakened past 87 per dollar on Monday after U.S. President Donald Trump announced new tariffs on Canada, Mexico, and China, rattling global markets. Although the U.S. later delayed levies on Canada and Mexico, providing temporary relief, the underlying uncertainty continues to weigh heavily on the Indian currency.
4. Dollar Demand from Foreign Banks and Importers
Apart from macroeconomic factors, dollar demand from foreign banks and importers contributed to the rupee’s decline. Importers rushed to purchase dollars to hedge against further depreciation of the rupee, while foreign banks increased their dollar holdings amid concerns over currency volatility.
While state-run banks tried to offer support by selling dollars near the 87.25 level, their efforts were overwhelmed by strong dollar demand and the triggering of stop-loss orders.
Rupee’s Performance in the Regional Context
Interestingly, the rupee’s struggles stand in contrast to the performance of other major Asian currencies. The dollar index fell 0.4% on Wednesday, and most Asian currencies gained against the U.S. dollar. However, these regional gains did little to buoy the rupee, highlighting the unique challenges facing the Indian currency.
So far in 2025, the rupee has declined over 2%, making it the worst performer among major Asian currencies. The reasons for this include:
- India’s widening current account deficit
- Foreign capital outflows
- Rising U.S. interest rates
- Domestic economic concerns related to growth and inflation
Outlook: What’s Next for the Rupee?
Looking ahead, the rupee’s trajectory will largely depend on the outcome of the RBI’s policy decision on Friday. While a 25-bp rate cut is widely anticipated, the tone of the RBI’s forward guidance will be crucial in determining how the currency reacts in the near term.
If the RBI adopts a dovish stance and hints at further rate cuts, the rupee could face additional downward pressure. Conversely, if the central bank surprises the market with a more hawkish tone or keeps rates unchanged, the rupee might find some support.
Expert Opinions on the Rupee’s Future
Several market analysts and economists have weighed in on the rupee’s outlook:
- HDFC Bank’s Chief Economist, Sakshi Gupta, noted, “The rupee is under pressure from both domestic and external factors. The key risk remains the RBI’s monetary policy decision. A rate cut, while necessary to support growth, could exacerbate the rupee’s weakness.”
- Kotak Securities stated in a note, “We expect the rupee to trade in the range of 87-88 per dollar in the coming weeks. The key drivers will be RBI’s policy stance, global risk sentiment, and foreign fund flows.”
Impact on Indian Economy and Markets
A weaker rupee has mixed implications for the Indian economy:
- Positive for Exporters: Sectors like IT services, pharmaceuticals, and textiles could benefit from a weaker rupee as it makes Indian goods and services more competitive in global markets.
- Negative for Importers: On the flip side, a weaker rupee increases the cost of imports, particularly crude oil, which can lead to higher inflation and a wider fiscal deficit.
For the equity markets, the rupee’s weakness could create volatility, particularly in sectors with high foreign currency exposure. However, export-oriented companies may see their earnings boosted by the favorable exchange rate.
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