Mint Primer | Rupee takes a dive, more turbulence in 2025

What triggered the rupee’s recent fall?

The Indian rupee breached a record low of 84.85 per dollar this week and briefly tested 85.06-per-dollar levels as outgoing Reserve Bank of India (RBI) governor Shaktikanta Das’s term ended on Tuesday. Known for his hawkish stance, Das’s departure might mark a shift to looser monetary policy as revenue secretary Sanjay Malhotra steps in as RBI governor for three years. In anticipation of an interest rate cut in February, currency traders are expecting the US-India interest rate differential to narrow in the near term. This expectation has driven up dollar demand, weakening the rupee.

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Why does the rupee keep depreciating?

Since India is a net importer of goods and services, demand for dollar is always high. Hence, by nature, the rupee is a depreciating currency. Its fall is limited by the RBI through planned interventions in the spot and forward foreign currency markets. However, increasing geopolitical uncertainty, attractive US government bond yields, cheaper crude oil prices and heavy foreign institutional investor outflow from domestic equities further boosted dollar demand and exacerbated the rupee’s fall at the fag end of 2024. Subdued exports have also reduced India’s dollar earnings and kept dollar supply low.

How has the rupee fared against peers?

It has held its ground better than most global peers this year, outperforming both emerging and developed market rivals. So far in 2024, the dollar index has risen almost 5% to 106.40, while major developed market currencies such as the Swiss franc, euro, Australian dollar and Japanese yen have fallen 5-7%. The rupee fell only around 2% against the dollar.

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What does it mean for the economy?

A depreciating rupee adds to the pain. It will increase India’s rising import bill while export earnings remain lacklustre. A recent India Ratings and Research report suggests India’s current account deficit is expected to widen to a seven-quarter high of $15 billion in Q2 from a $9.8 billion deficit in Q1. While Indians will pay more for foreign goods and services going ahead, “if the rupee stays within the 3% on-year depreciation range, it should not be a major issue", Anindya Banerjee, head, currency, Kotak Securities, said.

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What is the prognosis for 2025?

The rupee will most likely fall in 2025, with experts eyeing 85.5–86-per-dollar levels by the end of March, and 87 by the end of 2025. Market experts are anticipating a resurgence in US inflation next year because of brewing tariff wars and a low-tax environment once Donald Trump becomes president in March. This will prevent the US Federal Reserve from further cutting interest rates, making dollars more lucrative to hold, further boosting its demand. The headwinds for the rupee are intensifying, signalling volatility.