Rupee slumps to record low on global jitters, outlook remains fragile

The Indian rupee slid sharply on Wednesday, hitting a fresh record low of 91.7450 against the US dollar, weighed down by heightened global uncertainty leading to risk aversion across markets and outflows by foreign portfolio investors.

The domestic currency logged its steepest intraday fall in almost two months and depreciated over 7% against the dollar, even as the Reserve Bank of India stepped in intermittently to curb volatility.

Market participants attributed the rupee’s weakness to a confluence of geopolitical and financial factors that have soured global sentiment and rattled the markets after US President Donald Trump intensified the push to take control of Greenland and threatened to impose tariffs on major European nations that oppose his move.

The prospect of a trade confrontation between two of the world’s largest economic blocs has raised fears of supply-chain disruptions, prompting investors to pare exposure to riskier assets, including emerging market currencies.

“The move in the rupee is largely driven by uncertainty,” said Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services Ltd. “Geopolitical risks, tariff threats and fears of a trade war are hurting sentiment. When uncertainty rises, FPIs tend to withdraw from emerging markets like India, and that has put direct pressure on the rupee.”

In the near term, the rupee is likely to remain vulnerable. Bhansali expects levels of 92.5-93 per dollar now as realistic, with the possibility of testing 93.5 if global uncertainty persists and capital outflows continue.

“From a FX perspective, we now forecast USD/INR rising towards 92.00 by 3Q2026, from our previous expectation of 90.80. This implies continued INR underperformance against key G10 and Asia FX crosses, but with the pace of INR weakness slowing relative to last year given much cheaper FX valuations,” MUFG Bank said in its Asia Macro note on 16 January.

FPI outflows

“My official published forecasts seem obsolete after today's move," said Dhiraj Nim, economist and FX strategist at ANZ. "We had it going to 91.5 in our outlook, but that's already reached and breached. So, I think the risk is for USD and INR to go higher from here and technically be looking at 92-92.50 as an important range of resistance from here on.”

So far in January, FPIs have pulled out about ₹30,345 crore from Indian equities, adding to the strain on the currency. The equity sell-off has been mirrored in the benchmark indices, with the Nifty declining sharply over the past few sessions.

“...we have lowered our forecasts for foreign portfolio inflows, reflecting a delay in a trade deal between the US and India. We have now pushed out our expectation for a lowering of India’s tariffs to 2H2026, from our earlier assumption of early 2026,” MUFG Bank said.

Dollar demand from FPIs, importers and oil marketing companies remained strong, while stop-losses on short dollar positions were triggered as the rupee slipped into uncharted territory.

“There is genuine dollar demand in the system, which will have to be met. It is broadly expressing a view that the rupee has to be weaker than where it is from a fundamental perspective, even if you put speculation aside” Nim said, adding that much depends on the RBI's willingness to allow that adjustment and over what time period they're comfortable to let it happen.

Global factors have compounded the pressure. A sell-off in Japanese bonds, with long-term yields climbing above 4%, has unsettled funding markets and weakened risk appetite further, Bhansali said.

No aggressive intervention

This has come after the Indian unit depreciated over 6% in 2025 and became the worst-performing currency in the Asian basket. The dollar-rupee pair rose sharply towards 88 in February 2025 and despite FX intervention by the RBI to cap rupee weakness to the tune of more than $40 billion in the second half of 2025 and even more through the FX forward market around October 2025, the pair has broken above 90 and is now hovering around those levels.

Dealers said the RBI was present in the market through dollar sales, but the intervention was not aggressive enough to reverse the trend.

“RBI action can slow the pace, but unless there is a big-bang intervention, it cannot change the direction,” Bhansali said, adding that rising short positions in the offshore non-deliverable forwards (NDF) market are also reinforcing downside pressure on the rupee.

A sustained recovery would likely depend on an improvement in risk sentiment, progress on trade negotiations and a return of foreign inflows. Until then, most factors appear stacked against the rupee, keeping the outlook cautious.