Why the Indian Rupee’s Decline Against the US Dollar? Hitting 87.9563 before closing at 87.48

The Indian Rupee has recently approached a record low against the US dollar, hitting 87.9563 before closing at 87.48. This decline has raised concerns about market stability and the Reserve Bank of India’s (RBI) approach to currency management. RBI Governor Sanjay Malhotra emphasized that the bank is not targeting specific exchange rates but instead aims to ensure market orderliness.

In Short:

• Between April and November 2024, the RBI sold approximately $195.568 billion in gross dollars to stabilize the Rupee, which was in the range of 84-86 during this period.
• Geopolitical tensions and uncertainty surrounding the U.S. elections were significant contributors to the dollar’s strength, impacting the Rupee.

Current Currency Situation

On February 10, the Indian Rupee fell close to the 88 mark against the US dollar, which is a significant psychological threshold. This decline was exacerbated by new tariff plans introduced by U.S. President Donald Trump. The currency opened at 87.9175 and reached a new low of 87.9563 during trading.

RBI’s Policy Approach

Governor Sanjay Malhotra reiterated the RBI’s commitment to maintaining market efficiency and stability without targeting specific exchange rates. He stated that the central bank’s interventions are designed to smooth out excessive volatility rather than control the currency’s value directly. He acknowledged that while the Indian economy is robust, it is not immune to global economic pressures.

Factors Influencing the Rupee’s Decline

The Rupee’s depreciation can be attributed to several factors:

• Strengthening Dollar: The dollar’s rise has been driven by expectations of fewer interest rate cuts from the U.S. Federal Reserve in 2025.
• Trade Deficit and Crude Prices: A widening trade deficit and increasing crude oil prices have added pressure on the Rupee.
• Foreign Investor Outflows: Sluggish growth in Q2FY25 and outflows from foreign investors in the equity markets have further weakened the currency.

Comparative Currency Performance

Despite the recent decline, the Rupee’s depreciation of 2.9% in the first nine months of FY25 is relatively modest compared to other currencies, such as the Canadian Dollar and South Korean Won, which experienced declines of 5.4% and 8.2%, respectively. Additionally, between October and January, the Rupee was among the least volatile currencies in Asia, indicating the effectiveness of RBI’s interventions.