The currency repeatedly fell to record lows over the course of the year, at one point surpassing the 91 level, underscoring ongoing depreciation pressures.“The rupee’s performance this year has largely been a capital flow story, with the RBI taking a more pragmatic and flexible approach to the exchange rate and allowing the currency to weaken,” said Gaura Sen Gupta, economist at IDFC First Bank.
India’s balance of payments sliding into a deficit of roughly $22 billion between April and November, the largest in history, points to the external stresses facing the economy, Sen Gupta said.
A trade deal with the US could provide temporary relief, allowing the rupee to rise to around 88.50 in March before underlying pressures reassert themselves and weaken the currency again, she said.
A Reuters poll largely agrees with that view.
ANOTHER STORY FOR THE RUPEE
The rupee’s rough patch is in stark contrast to its rout in 2022, which saw aggressive rate hikes by the US. The Federal Reserve sparked a broad rally in the dollar.
In 2025, the backdrop was very different: the dollar index fell by about 9.5% due to interest rate cuts by the Federal Reserve and restrictive US trade policies, which supported most Asian currencies.
The rupee’s underperformance against its peers was largely a result of large 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.
Protracted negotiations with the US have compounded the capital flow challenge by reducing the predictability of India’s trade prospects.
US policy uncertainty dampened interest in the rupee, setting it apart from Asian countries that faced less rate-related pressure.
CHANGE IN RBI’S APPROACH
The Reserve Bank of India’s approach to rupee movements changed after Sanjay Malhotra became governor in December 2024.
Under Malhotra, the RBI has become more tolerant of currency weakness, with its market interventions focused on managing depreciation expectations and countering the build-up of one-sided speculative positions, bankers said.
This change was most evident in mid-December, when the rupee fell above the 91 per dollar mark for the first time. The RBI intervened heavily to rein in speculative pressure without advocating a specific level, bankers said.
The fall of the rupee in 2025, along with the rally in other currencies, means that the rupee is no longer overvalued.
According to central bank data, India’s trade-weighted real effective exchange rate fell to 97.5 in November from 104.7 in January 2025. A reading above 100 indicates a currency is overvalued, while a level below 100 indicates it is undervalued.
Dhiraj Nim, economist and currency strategist at ANZ Bank, said given steep US rates, a calibrated path tilted towards a slightly undervalued rupee in the medium term will help exporters.
“A weaker INR can cushion and provide relief to local currency earnings of an affected Indian exporter.”
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