What's the anticipated path for the Indian currency, the rupee?
The Indian Rupee (INR) has witnessed a significant depreciation against the US Dollar (USD) in the second quarter of 2025, despite a weakening US Dollar Index. This unexpected move can be attributed to a combination of domestic structural issues and external pressures that outweighed the global softness of the dollar.
The persistent trade imbalance and heavy reliance on imported crude oil have exerted constant pressure on the rupee, increasing demand for dollars. The Reserve Bank of India (RBI) also scaled back its direct support in the forex market, limiting its ability to curb rupee depreciation.
Significant outflows from Indian equities and bonds occurred in Q2 2025, with foreign portfolio investors withdrawing about $12.3 billion. This weakening demand for the rupee was further aggravated by renewed US tariff threats against India, ongoing trade uncertainties, and regional geopolitical risks such as the May 2025 Indo-Pakistan conflict.
Moreover, $500 billion in corporate dollar debt repayments elevated demand for dollars and added depreciation pressure on the rupee. The monetary policy divergence and global risk sentiment also played a role, with the US monetary tightening earlier in the year bolstering the dollar's fundamental strength, while the RBI hinted at rate cuts, increasing downward pressure on the INR.
In essence, the rupee's depreciation reflected India-specific vulnerabilities—import bills, trade deficits, capital outflows, geopolitical risks, and limited RBI intervention—that dominated despite a weaker broad dollar index.
Looking ahead, the rupee may potentially fall back to test the 89.50-89.70 or even 89.90-90 region if it breaks above 88.20. On the other hand, if the rupee manages to break 86.90, it can see an extended rise to 86.50, but not beyond that, delaying the expected fall to 89.50-90. Short-term support for the rupee is in the 88.10-88.20 region.
The dollar index, currently at 98.18, has found a strong long-term trendline support around 96 and may have already found its bottom. If the dollar index sustains above 96, a rise to 106-108 cannot be ruled out.
The escalation in the Israel-Iran war caused a sudden spike in the Crude Oil price, which knocked the rupee down by 2%. The US remains the largest export destination for India, accounting for an average of 18% of total exports. Unless the foreign portfolio investors (FPIs) stop their selling spree and start buying Indian equities consistently, the rupee is unlikely to gain ground.
The rupee may continue to weaken, with a potential fall below 87.10-87.20 in the near term due to a head and shoulder bearish reversal pattern on the chart. A further rise to 87.10-87 is possible before the rupee reverses lower again, reaching the 88.10-88.20 region.
High import tariffs in the US increase the danger of a global slowdown or within the US itself, potentially impacting the Indian economy further. According to various research reports, the total 50% tariff levied is likely to bring down India's annual growth by 30-50 basis points.
In conclusion, the Indian rupee's depreciation in Q2 2025 is a complex issue influenced by both domestic and global factors. While the RBI's intervention can potentially stabilise the rupee in the short term, long-term recovery may depend on resolving domestic structural issues, improving the trade balance, and attracting consistent foreign investments.
- The trade imbalance, reliance on imported crude oil, and increased demand for dollars due to corporate debt repayments have put constant pressure on the Indian Rupee (INR), contributing to its depreciation against the US Dollar (USD).
- The Reserve Bank of India (RBI) scaling back its direct support in the forex market has limited its ability to curb rupee depreciation, adding to the issue.
- Significant outflows from Indian equities and bonds, coupled with renewed US tariff threats, ongoing trade uncertainties, and regional geopolitical risks have further aggravated the weakening demand for the rupee.
- The monetary policy divergence and global risk sentiment have also contributed to the rupee's depreciation, with the US monetary tightening earlier in the year bolstering the dollar's fundamental strength.
- The escalation in the Israel-Iran war caused a sudden spike in Crude Oil price, which knocked the rupee down by 2%. The US, being the largest export destination for India, may have a significant impact on the rupee's future performance, depending on foreign portfolio investors' (FPIs) decisions regarding buying Indian equities consistently.
