The Indian rupee is set to log its steepest annual decline in three years, pressured by record equity outflows, weak capital inflows and prolonged uncertainty over a US trade deal
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MUMBAI The Indian rupee is poised
for its largest annual fall in three years, weighed down by
record equity outflows and the lack of a U.S. trade deal that
left it out of the rally across Asia, with prospects for a
recovery tied to the trade pact.
The rupee was quoting at 89.8650 per U.S. dollar at
10 a.m. IST on Wednesday, marking a 4.74% decline for the year,
its worst showing since 2022 when it dropped nearly 10%.
The currency repeatedly fell to record lows during the year,
slipping past the 91 level at one point, highlighting the
sustained depreciation pressure.
“The rupee’s performance this year was largely a
capital-flow story, with the RBI adopting a more pragmatic and
flexible approach to the exchange rate and allowing the currency
to weaken,” said Gaura Sen Gupta, an economist at IDFC First
Bank.
India’s balance of payments slipping into a roughly $22
billion deficit between April and November, the largest
historically, indicates the external strains facing the economy,
Sen Gupta said.
A trade deal with the U.S. could offer temporary relief,
potentially lifting the rupee to around 88.50 by March, before
underlying pressures reassert themselves and the currency
weakens again, she said.
A Reuters poll broadly aligns with that view.
A DIFFERENT STORY FOR THE RUPEE
The rupee’s rough patch stands in marked contrast to its
rout in 2022, when aggressive rate hikes by the U.S. Federal
Reserve fuelled a broad rally in the dollar.
In 2025, the backdrop was very different with the dollar
index down about 9.5% on Federal Reserve rate cuts and
restrictive U.S. trade policy, which supported most Asian
currencies.
The rupee’s underperformance relative to its peers was
largely a function of heavy equity outflows and slowing capital
inflows elsewhere, economists said.
Foreign investors withdrew a record $18 billion from Indian
equities in 2025, while debt, external commercial borrowing and
foreign direct investment flows were subdued.
Prolonged negotiations with the U.S. further compounded
the capital flow challenge by reducing predictability around
India’s trade outlook.
U.S. policy uncertainty dulled appetite for the rupee,
setting it apart from Asian peers that faced less tariff-related
pressure.
SHIFT IN RBI’S APPROACH
The Reserve Bank of India’s approach to rupee swings saw a
change after Sanjay Malhotra became governor in December 2024.
Under Malhotra, the RBI has become more tolerant of
currency weakness, with its market interventions primarily aimed
at managing depreciation expectations and countering the buildup
of one-sided speculative positions, bankers said.
This change was most evident in mid-December, when the rupee
fell past the 91-per-dollar mark for the first time. The RBI
intervened heavily to rein in speculative pressures while not
defending a specific level, bankers said.
The rupee’s decline in 2025 alongside the rally in other
currencies means the rupee is no longer overvalued.
India’s 40-currency trade-weighted real effective exchange
rate declined to 97.5 in November from 104.7 in January 2025,
according to central bank data. A reading above 100 indicates
that a currency is overvalued, while a level below 100 suggests
it is undervalued.
Dhiraj Nim, an economist and FX strategist at ANZ Bank, said
that considering the steep U.S. tariffs, a calibrated path,
tilted towards a mildly undervalued rupee over the medium term,
will help exporters.
“A weaker INR can cushion the local currency earnings of an
impacted Indian exporter, providing relief.”
Published on December 31, 2025
