The Indian rupee has slumped 4.5% in 2025, becoming Asia’s weakest currency. Explore the key reasons behind this decline, including US tariffs, foreign fund outflows, weak trade dynamics, and what could stabilize the currency.
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If you have been following news about money and investments, you have probably heard that the Indian rupee is struggling. The currency touched a record low of 89.66 against the US dollar recently, and it continues to weaken. This might seem confusing because India’s economy is actually growing well and remains one of the world’s fastest-growing. So why is the rupee falling so badly? The answer lies in a mix of global forces and problems closer to home.
The Big Picture: A 4.5% Slide This Year
The rupee has depreciated roughly 4.5% against the US dollar in 2025, making it Asia’s worst-performing currency. To put this in perspective, this is a significant drop for the currency. Most other Asian currencies like the Chinese yuan, Thai baht, Malaysian ringgit, and Singapore dollar have either held steady or even gained value against the dollar. The Korean won and Japanese yen have also weakened, but not as sharply as the rupee. This poor performance stands out especially because India’s economy is fundamentally strong. The stock market remains near all-time highs, and the country continues to grow faster than most developed nations. Yet the rupee keeps falling. Understanding why requires looking at several interconnected factors.
The Foreign Investor Exodus: Money Leaving India
One of the biggest reasons behind the rupee’s weakness is that foreign investors have been pulling money out of India at an alarming rate. So far in 2025, Foreign Portfolio Investors (FPIs) have withdrawn approximately 1.44 lakh crore rupees, equivalent to about 16.4 billion US dollars, from Indian equity markets. This represents a massive reversal from previous years when these investors were typically net buyers of Indian stocks. When foreign investors sell Indian stocks and bonds, they need to convert rupees into dollars to take their money home. This creates a surge in demand for dollars and pushes the rupee lower.
The question is why are these investors leaving? Several things have spooked them. First, there is uncertainty about a potential trade deal between India and the United States. This delay in negotiations has made global investors nervous about India’s economic prospects. Second, India now faces a 50% US tariff on its exports, which was implemented in August 2025. This is the highest tariff rate that America has imposed on any Asian nation. By contrast, China’s goods face lower tariffs despite broader trade tensions. This asymmetry has confused investors and made them question whether India can maintain its trade and growth momentum.
American Tariffs: The Trade War Complication
To understand the tariff issue better, imagine you are an Indian exporter selling textiles or engineering products to America. In May 2025, you faced a 25% tariff. By August, this doubled to 50%, meaning your products suddenly became much more expensive for American buyers. Between May and September, India’s exports to the US plummeted 37.5%. That is a stunning decline in just four months. With exports falling, companies are earning fewer dollars, which means less foreign currency is flowing into the country to supply the market. This scarcity of dollars naturally makes the rupee weaker.
Moreover, the tariff situation has created uncertainty. Investors are unsure whether these rates will remain, increase further, or eventually normalize through a trade deal. This uncertainty paralyzes decision-making. Companies hesitate to invest in exports, and foreign investors wait on the sidelines instead of pouring fresh money into India. As long as this uncertainty persists, the rupee will likely remain under pressure.
The Trade Deficit Problem: Importing More Than Exporting
India has a classic external problem: it imports far more than it exports. In October 2025 alone, India’s trade deficit reached 41.7 billion dollars, the highest monthly deficit on record. This massive gap is partly driven by seasonal factors, particularly the festive season when India celebrates multiple festivals that involve gold jewelry purchases. Gold imports surged 199% year-on-year in October to 14.7 billion dollars, compared to just 4.9 billion dollars the previous year. While festive demand is normal and temporary, it still puts pressure on the rupee by requiring the import of foreign currency to pay for these purchases.
Beyond gold, India is also importing more electronic goods, machinery, and chemicals, reflecting strong domestic consumption. The problem is that exports are not keeping pace with these imports. India’s merchandise exports actually fell 11.8% in October. So the country needs to send more dollars outside to pay for imports, but is not earning enough dollars through its exports. This fundamental imbalance pushes the rupee lower.
Weak Domestic Numbers Adding to Worries
Recently, India’s manufacturing and services activity showed signs of slowdown. The PMI (Purchasing Managers Index), which measures private sector activity, hit a six-month low in November. This is the kind of data that makes investors nervous. Even though India’s economy is still growing, signs of momentum loss can trigger selling in the stock market and outflows of foreign investment. This happened in November when the rupee fell sharply after weak PMI data alongside continued trade deal delays.
When domestic activity slows, investors worry about future earnings and dividend payments. This triggers more selling, which means more foreign investors converting rupees into dollars to exit. The rupee weakens further as a result.
Comparing Other Asian Currencies: Why They Are Performing Better
While the rupee has struggled, other Asian currencies have shown more resilience. The Thai baht strengthened 5.1% against the dollar in the first half of 2025 and continued to hold its gains through August. Similarly, the Malaysian ringgit rallied 5.1% against the dollar in the second quarter and has remained relatively stable. The Singapore dollar has been one of Asia’s top performers, appreciating in consecutive quarters of 2025. The Chinese yuan has also remained relatively stable.
However, not all Asian currencies have fared well. The Korean won has also weakened significantly against the dollar in 2025, and the Japanese yen has shown weakness too. The Philippine peso and Vietnamese dong have breached record lows. So while the rupee is Asia’s worst performer, it is not the only currency struggling. The difference is that most other weak Asian currencies face different structural problems. India’s specific problem is the combination of capital outflows triggered by trade uncertainty and tariff concerns, alongside a worsening trade deficit.
Can the Rupee Fall to 90 Against the Dollar?
Many analysts believe the rupee is likely to test the psychologically important level of 90 rupees per dollar in the near term. Some forecasts suggest it could even reach 90.40 to 91 levels if current pressures persist. However, the Reserve Bank of India (RBI) has been actively intervening to slow the rupee’s fall. The RBI sold dollars in both the offshore and onshore markets to prevent panic and excessive volatility. The central bank’s interventions have helped the rupee recover from its recent lows, but they cannot indefinitely prop up the currency without limiting their foreign exchange reserves.
According to a poll of analysts by Business Standard, the rupee is expected to touch 90 against the dollar in the coming weeks, but could then recover to around 88.50 by the end of December if a positive US-India trade deal materializes. The key variable, therefore, is the status of trade negotiations between the US and India.
What Could Stabilize the Rupee?
The most important stabilizing factor would be a favorable resolution of the India-US trade dispute. If the two countries agree on a deal that either reduces or freezes the current 50% tariff rate, investor sentiment would improve dramatically. Analysts estimate that the rupee could appreciate 100 to 150 paise (roughly 1 to 1.5%) from current levels back to 88 per dollar if such a deal is announced. This would bring back some of the gains lost earlier in the year.
Beyond trade negotiations, the RBI’s monetary policy decisions could also influence the rupee. If the central bank cuts interest rates in December, as many analysts expect, it could provide temporary support to the currency by improving overall financial conditions. Additionally, if global economic conditions stabilize and the US dollar weakens from its current strong levels, the rupee would benefit. The RBI interventions also help manage volatility and prevent panic, which is crucial for maintaining order in currency markets.
Key Risks That Remain
Despite some positive factors, significant risks persist. If the US-India trade deal falls through or takes much longer to finalize, the rupee could fall further toward 91 or even 92 levels. Continued foreign investor outflows would add downward pressure. If global crude oil prices spike due to geopolitical tensions, India’s oil import bill would rise, widening the trade deficit further. Additionally, if global investors maintain a risk-off sentiment and prefer to keep money in safe dollar assets, FPI outflows from India could accelerate. The RBI’s capacity to intervene is not unlimited either. While the country maintains comfortable foreign exchange reserves of around 692 billion dollars, continuously selling dollars to defend the rupee could eventually limit the RBI’s firepower.
Conclusion
The rupee’s slide this year is not coming from one weak spot. It is the result of global uncertainty, trade tensions, and India’s own external imbalances lining up at the same time. Strong GDP growth and a healthy stock market are not enough to offset the pressure from heavy foreign investor outflows, a widening trade deficit, and the sharp hit to exports after the US imposed steep tariffs. These factors have pushed up demand for dollars while reducing the supply coming into the country, which naturally weakens the currency.
RBI intervention has prevented a disorderly fall, but it can only smooth volatility, not reverse the underlying forces pulling the rupee down. Much now depends on how the India-US trade talks progress. A stable agreement could calm investor nerves, improve export visibility, and bring some strength back to the currency. A delay or breakdown, however, keeps the door open for the rupee to test new lows.
In short, the rupee is under strain because of a mix of global and local challenges. The situation is not permanent, but recovery will require clarity on trade policy, steady capital flows, and a narrower trade deficit. Until then, the rupee will remain sensitive to shocks.
Source: Rupee recovers as RBI intervention cools pressure from strong US dollar & Rupee crash explained: Why INR hit a record low & what happens next? Naveen Mathur weighs in
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