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The drivers of the rupee decline in 2025 were largely external rather than domestic, reinforcing view that the currency weakened more due to global shocks than internal fragility.
Rupee Vs Dollar In 2025.
The Indian rupee closed 2025 under sustained pressure, ending the year near historic lows against the US dollar after depreciating 4.7% during the calendar year. While the headline number places the rupee among Asia’s weaker currencies in 2025, the drivers of the decline were largely external rather than domestic, reinforcing the view that the currency weakened more due to global shocks than internal fragility.
After already slipping 2.8% in 2024, the rupee’s extended decline marked another difficult year for India’s currency, which spent much of the second half of 2025 hovering close to the psychologically important Rs 90-per-dollar level, according to a report titled ‘India’s Rupee in 2025: Navigating External Shocks’ authored by Anil Kumar Bhansali, executive director of Finrex Treasury Advisors.
A year shaped by global headwinds
The rupee’s trajectory through 2025 followed a clear pattern. The first quarter saw relative stability, with mild depreciation as foreign portfolio investor (FPI) outflows began and the Reserve Bank of India (RBI) stepped in to smooth volatility. Pressure intensified between April and July as global dollar strength and sustained FPI selling weighed on emerging market currencies, according to the report.
The most acute stress emerged between August and October, when trade-related tensions escalated. The US imposed steep tariffs on Indian goods, partly linked to India’s purchases of Russian oil, worsening sentiment and widening the trade deficit. By November and December, the rupee was testing record lows, with persistent capital outflows keeping it under strain, the report added.
FPIs, rates and geopolitics drove the slide
Foreign portfolio investors were net sellers of around $10 billion during the year, rotating capital towards markets such as the US, Europe, Japan, South Korea and China, where AI- and technology-led growth offered better risk-adjusted returns. India’s appeal also dimmed after the RBI cut policy rates by 125 basis points, narrowing the yield differential with the US, where Treasury yields hovered around 4.5%.
Geopolitics compounded the problem. The US imposed cumulative tariffs of up to 50% on Indian exports during 2025, hurting trade sentiment. Although lower crude oil prices saved India nearly $22 billion on the import bill, the benefit was partly offset by higher gold and defence imports, according to the report.
External balance held, but pressures built up
India’s current account deficit (CAD) improved to around 0.8% of GDP in the first half of FY26, reflecting lower energy costs. However, the report flags that the CAD could widen to around 2.5% of GDP in the second half, driven largely by strong gold demand and a wider merchandise trade gap.
Despite these pressures, domestic macro fundamentals remained relatively resilient. Growth stayed strong, inflation eased sharply, and fiscal stability held up — reinforcing the assessment that the rupee’s weakness was not a reflection of domestic stress.
RBI’s currency management
The RBI played a critical role in preventing disorderly movements. While it intervened frequently to smooth volatility, the central bank also used the opportunity to rebuild reserves. During 2025, it is estimated to have added nearly $50 billion to its forex stockpile.
The RBI also reduced its large oversold forward position. From a peak short position of about $88 billion, the forward book improved to around $53 billion by August, before moving back towards $70 billion by November. Markets increasingly viewed the RBI’s approach as a managed crawl, allowing gradual depreciation while firmly resisting panic-driven moves, the report said.
Valuation correction, but no relief rally
On a real effective exchange rate (REER) basis, the rupee corrected sharply during the year, falling from around 108 to 98, suggesting undervaluation. Yet this did not translate into a relief rally. Persistent dollar demand from FPIs, oil companies and importers meant the rupee failed to benefit even when the dollar index softened or the Chinese yuan strengthened.
Looking into 2026: stability, not strength
The report outlines three broad scenarios for 2026.
In a base case, considered the most likely, the rupee is expected to trade in a Rs 88-92 range, supported by gradual US Federal Reserve rate cuts, stable oil prices and moderate capital inflows.
A bullish scenario, contingent on tariff relief and strong global risk appetite, could push the rupee towards Rs 84-87, though this is seen as less probable.
Conversely, if tariffs persist and geopolitical tensions intensify, the rupee could weaken further towards Rs 92-96.
“The rupee has repeatedly lost 15-18% in each major depreciation cycle since 2000, with the latest phase showing an ~8% fall to 91.08 levels. A US-India trade deal could strengthen the rupee toward 87-88, though RBI’s $60-65 bn short position may limit gains. If the deal falters, the rupee risks weakening to 92-94, in line with past 13-15% depreciation patterns as the rate gap narrows,” the report said.
In 2025, the rupee fought another familiar battle — against global risk aversion, capital flow volatility and geopolitics. While the currency ended the year weaker, it did so without triggering a balance-of-payments crisis or macro instability. The message from the year gone by is clear: the rupee remains vulnerable to global shocks, but its foundations at home are sturdier than the headline depreciation suggests.
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December 29, 2025, 16:08 IST
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