Topic 3: RUPEE: TUMBLING BELLS

In September 2025, the Indian rupee witnessed a notable phase of depreciation, slipping close to its all-time low of around ₹88.80 per US dollar. The downward movement of the currency was shaped by a confluence of domestic and global developments that heightened investor uncertainty and intensified dollar demand. The depreciation underscored the vulnerability of emerging market currencies, including the rupee, to global monetary shifts, trade tensions, and capital flow reversals. One of the foremost drivers of the rupee’s decline was the heavy portfolio outflows by foreign institutional investors (FIIs). In the latter part of September alone, FIIs withdrew nearly $2 billion from Indian equities, largely due to concerns over weakening global risk appetite and heightened uncertainty surrounding U.S.-India trade relations. The sell-off in Indian equities and debt markets was further exacerbated by profit-booking tendencies and a flight to safer assets like U.S. Treasury bonds amid global volatility. The escalation in U.S.-India trade tensions was another key factor influencing the rupee’s slide. The U.S. government’s decision to raise tariffs on Indian exports—from 25% to 50%—significantly dented India’s export competitiveness and investor sentiment. Additionally, the sharp increase in H-1B visa fees created further strain on bilateral relations, particularly affecting India’s information technology and services sectors that rely heavily on U.S. contracts and workforce placements. These developments led to reduced confidence among global investors and encouraged further capital withdrawals, amplifying the pressure on the currency. Domestically, India’s widening trade deficit added structural weakness to the rupee. Although exports showed moderate growth in select categories, high gold imports ahead of the festive season, along with elevated crude oil prices, inflated the import bill. Brent crude prices climbed back toward $70 per barrel during the month, driven by geopolitical conflicts and production cuts. The increase in oil prices directly impacted India’s current account deficit, as the country imports more than 80% of its crude oil requirements. The combined impact of higher import costs and persistent demand for U.S. dollars to settle trade payments aggravated the depreciation pressure on the rupee. Global financial market volatility also played a significant role. Investor sentiment toward emerging markets weakened amid rising geopolitical tensions—particularly those related to the Russia-Ukraine conflict and renewed uncertainty around Iran’s nuclear negotiations. Heightened global security concerns and uneven economic recoveries led investors to rebalance their portfolios toward developed markets, strengthening the U.S. dollar’s relative demand. Although the U.S. Dollar Index (DXY) fell by around 6.6% against major currencies, the rupee depreciated more sharply, indicating that domestic challenges had a more pronounced effect than global currency movements. The Reserve Bank of India (RBI) maintained a vigilant stance throughout the month, intervening selectively to prevent disorderly fluctuations in the foreign exchange market. The central bank’s strategy reflected a delicate balance between allowing market-driven depreciation to preserve external competitiveness and ensuring financial stability by curbing speculative volatility. Despite short-term weakness, the RBI emphasized that India’s macroeconomic fundamentals—such as strong foreign exchange reserves, moderate inflation, and steady growth momentum—remained resilient. Overall, the rupee’s depreciation in September 2025 was the result of a complex interplay between domestic structural pressures and adverse global economic conditions. Trade imbalances, capital outflows, and geopolitical uncertainties converged to create sustained pressure on the currency. However, India’s underlying economic strength and policy stability continued to offer a buffer against excessive volatility.