The rupee hit 95.58 against the dollar on Thursday — a record low that marks a continuation of a depreciation trend that has been driven by a combination of factors, none of them immediately reversible.
The currency closed at that level after a session in which the Reserve Bank of India was reportedly present on the other side of transactions but chose not to defend a specific level, allowing the market to find its own equilibrium. That decision — to permit the depreciation rather than fight it — is itself a message about the RBI’s current thinking.
What’s Driving the Fall
The dollar’s strength globally has been the primary driver. The Federal Reserve’s rate path — which has kept US rates elevated longer than many markets anticipated — has strengthened the dollar against virtually every major currency. The rupee’s fall is severe in absolute terms but less exceptional in relative terms: comparable economies’ currencies have also depreciated significantly against the dollar over the same period.
India-specific factors include: sustained current account deficit driven by elevated oil prices, portfolio outflows as investors rebalance toward dollar assets in a high-rate environment, and some domestic economic uncertainty around the fiscal trajectory ahead of the budget.
Who Gets Hurt, Who Benefits
A weaker rupee is a tax on importers and a subsidy to exporters — the distributional effects are not uniform. India’s IT and software services sector, which earns in dollars and employs in rupees, benefits from depreciation. Sectors that rely on imported inputs — electronics, chemicals, pharmaceuticals — see margins squeezed.
Consumers feel it through higher prices for imported goods and through the pass-through of higher oil costs into fuel prices and, eventually, transport and logistics costs across the economy.
What the RBI Can Do
The RBI has forex reserves — currently in the range of $650+ billion — that give it significant capacity to intervene and slow the depreciation if it chooses to. Its apparent decision not to defend 95 suggests either that it views current levels as appropriate given fundamentals, or that it is preserving reserves for conditions it considers more threatening.
The next MPC meeting, and particularly the accompanying commentary on the rupee, will be watched carefully.
