The rupee has breached the 89-per-dollar mark for the first time, and economists say the currency’s weakness is far from over. Even if New Delhi finally seals the long-pending trade agreement with Washington—a deal the markets have been waiting on for weeks—the lift to the rupee will likely be temporary. The structural forces at play are deeper, and the central bank’s room to fight them is shrinking.
Gaura Sengupta, chief economist at IDFC First Bank, says: “A trade deal may give you some days of strength, but depreciation will resume after that.” Dhiraj Nim, economist and forex strategist at ANZ, echoes the view: “A favourable trade deal could ease pressure in the near term. But over the medium term the rupee should depreciate modestly to maintain [export] competitiveness.”
The rupee fell sharply on November 21, to breach the 89-per-dollar mark after weeks of heavy central-bank defending. The fall came on the back of subtle but important shifts in the global backdrop. Markets had probably positioned themselves for an imminent India-US trade deal announcement and when the announcement didn’t come, those positions unwound, says Sengupta.
For weeks, the Reserve Bank of India (RBI) aggressively defended the currency. The last major push came near 88.8, when the central bank pulled the rupee back below 88 to signal it would not tolerate speculative pressure. But on Friday, the RBI stepped aside, probably because of the “broad strength of the US dollar”, according to Nim.
“What changed on Friday was the broader global backdrop. Markets are now debating whether the Fed will cut rates in December, and the odds of a cut have been declining. This has strengthened the dollar, which may be why the RBI felt comfortable allowing the rupee to move past 89.” From here on, Nim expects the RBI to count on a favourable trade deal to ease pressure on the currency, potentially even pushing USD-INR lower.
Sengupta explains why the RBI couldn’t keep holding the line forever. This year, it entered FY26 with a forward book heavily net dollar-short—about $84 billion as of March. When the RBI sells dollars in the spot market to defend the rupee, it drains rupee liquidity. To neutralise that drain, it uses buy-sell swaps in the forward market. “RBI’s ability to defend aggressively is limited,” Sengupta says. “They can’t keep making the forward book more net dollar-short.”
The other two reasons for the rupee falling rupee are a slowdown in capital inflows and widening of the trade deficit, with gold imports being a major driver of the latter.
The Indian rupee breaching 89 is significant for the market as it had become a psychological level, explains Nim. “This is especially when nothing much has fundamentally deteriorated in India’s economic narrative so far: Growth is holding up well, inflation is very subdued and export recession so far is not as deep as was feared.”
But for the economy, he says, it is not that turbulent. “A weaker exchange rate is unlikely to limit monetary policy scope as inflation is very low. It also means increased currency competitiveness, which is good for exports.”
A trade deal with the US may bring relief, but not a reversal. “I am still maintaining my forecast of 88 by December, though it could end up slightly higher. A favourable trade deal could significantly ease pressure on the rupee in the near term. Over the medium term, however, the RBI would remain focussed on the competitiveness of the currency,” says Nim.
The logic is straightforward: The global trade pie is possibly smaller now because of tariffs, which means competition for export market share is now more intense. “And since India does not export many high-tech, price-insensitive goods, exchange-rate competitiveness becomes an important policy tool. Therefore, the rupee should depreciate modestly over the medium term to maintain competitiveness.”
Sengupta points out that foreign portfolio flows have been weakening long before the latest volatility. Investors view Indian equity valuations as stretched, and the rupee’s depreciation erodes dollar returns further. Other emerging markets—particularly China—have seen a pickup in flows. India hasn’t.
The real drag is the capital account, not trade. “Our expectation is that the rupee may get some temporary relief if the India-US trade deal is announced—you might see it strengthen for a day or two—but we still expect depreciation to resume after that. The underlying problem is the weak capital account.”
First Published: Nov 22, 2025, 18:31
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