Rupee slides, not expert sentiments
All fine if the rupee depreciates further, based on fundamentals, say experts, adding this could be the best time for it to happen
Last Updated: Dec 24, 2025, 11:16 IST4 min
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The rupee continues to fall against the dollar, hitting a new record intra-day low of 90.74 to the US dollar on December 15, alarming the media, if not economists and the regulator on where the currency could find stability against the dollar. The rupee has now depreciated nearly 5.5 percent against the dollar in 2025. Its depreciation has been higher against the euro (19 percent), CNY (12.5 percent) and pound (12.1 percent).
The public at large would be worried about the falling rupee, with a range of factors playing out: Costlier imports, higher overseas education costs and increased travel costs. But the exchange rate is very much a reflection of the domestic fundamentals and the movement of the dollar (depending on its economy and global macroeconomic conditions).
At this juncture, India’s pace of economic growth has been better-than-expected, with a six-quarter high of 8.2 percent for Q2FY26. It is capital inflows that remain soft. Foreign outflows for 2025 so far have been calculated at near Rs1.61 lakh crore, based on latest NSDL data.
Experts say that the forex reserve accretion is an important factor for the Reserve Bank of India (RBI). If the net dollar inflow is negative or in single digits, it creates challenges in terms of building forex reserves. India has 10 months of import cover, but according to Anubhuti Sahay, head, India economic research at Standard Chartered Bank, the visibility of how much reserves can be built is not there.
Allow the rupee to fall
Unlike in 2022 and even in November 2025, market experts are of the view that the RBI has allowed the rupee to be aligned to market fundamentals; it used to intervene when it had large forex reserves for import cover. “It had the ammunition to keep intervening [and support the rupee from falling],” Sahay says. “Its intervening strategy is based on import cover and its assessment on whether the push on rupee is speculative or fundamental,” she says.
Sahay argues that the RBI need not defend the rupee unnecessarily, as depleting the ammunition it has would have bigger challenges for the central bank. Having three months of import cover is considered fine and having eight months of cover is strong.
Somnath Mukherjee, chief investment officer at ASK Wealth Advisors, highlights the point that a falling currency is not equivalent to a weakening economy. “There is no correlation between the strength of a currency and a national virility test. A currency reflects the demand-supply situation of the forex,” Mukherjee says. He adds that the level of currency acts as a shock absorber for the system that enables policy makers to use fundamental tools—fiscal and monetary—to focus on growth and jobs.
“Otherwise, if level of currency becomes the objective of macro-policy making, interest rates should be kept higher than they should be or demand has to be kept depressed from where optimum levels are,” Mukherjee says.
Best timing for the rupee to fall
The currency is a relevant issue in terms of flow through in inflation. It obviously remains a big component of imported inflation. With inflation forecast being revised downward by the RBI to 2 percent for FY26, WPI (wholesale price index) down 1.21 percent for October, retail inflation at 0.7 percent in November, and global oil prices at $63.3 to a barrel, “this is the best timing India could chose to allow the currency to depreciate”, Mukherjee tells Forbes India. All this means that if ever we had to choose a time for the currency to act as a shock absorber, this would be it… inflation will be minimal, he says.
Mukherjee argues that the “bigger impact is the overhang of the US trade tariff discussions”. The Indian government has indicated that it is in no hurry to sign the deal. “US’s trade weighted tariffs on India are at 34 to 35 percent, but the government is not worried. It is allowing the process to go through,” Mukherjee says.
“India has not bent over backwards on the Russian oil issue to get tariff relief from the US. It is readying for the long haul on tariffs,” Mukherjee wrote in the The Times of India in December. US’s trade tariffs on India continue to be among the highest in the world, compared to our export contemporaries.
What could really change the rupee trajectory against the dollar is an increase in capital inflows. A sentiment overhang of the US-India trade deal could also help. “It might then see a pull-back in the rupee,” Mukherjee says. India’s chief economic adviser V Anantha Nageswaran is hopeful that the deal could be signed by March 2026, say media reports.
Both the RBI and government are also sensitive to the view that real interest rates are too high. When a foreign investor is looking to make an investment in India and if real interest rates are high and the currency is not competitive compared to other currencies, it might slowdown the decision to invest.
Mukherjee, like Sahay, is comfortable with the possibility of the rupee depreciating further.
In this scenario, the RBI will continue to want to project that it will not target the level of the currency but target the volatility of the currency. Sahay and Mukherjee say the RBI will allow the market to find its own levels, but will intervene to dampen volatility.
Once again, eyes will be on whether capital inflows improve over the next few months and if the trade deal comes through. If capital flows improve, then the rate of depreciation can certainly slow. The trade deal would be more of a sentiment driver.
First Published: Dec 24, 2025, 11:16
Subscribe Now(This story appears in the Dec 26, 2025 issue of Forbes India. To visit our Archives, Click here.)
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