Talk of the Indian rupee at 100 to the dollar is back. The currency has been among the worst performers globally since 2025, and 2026 hasn’t offered much relief. It has continued to weaken, even as the 95 level against the US dollar holds, for now.
The rupee on Thursday settled at 94.84 against the dollar, up 4 paise on the day—little to change the broader direction. That direction, though, is unmistakable.
That marks a sharp reversal from just a few years ago, when the rupee ranked among the more stable emerging-market currencies. From late 2022 to late 2024, it did not breach 85 to the dollar—a period of unusual calm.
That phase is over.
Since breaking past 85 in January 2025, the rupee has largely moved in one direction—down. So what comes next? Does the slide continue, or is a recovery in sight?
What’s driving the rupee’s decline?
A stronger dollar: This is the primary force. Much of the narrative has focused on foreign investors pulling money out of India, often framed as a sign of domestic weakness. That misses the point.
Capital flows are driven by returns, not sentiment. Investors deploy money abroad to earn more than they would at home, and they measure those returns in their home currency, typically US dollars.
Those returns have two components: gains in local assets (rupees, in India’s case) and currency movement. If the rupee weakens against the dollar, it erodes—or even wipes out—those gains when converted back into dollars. The reverse, of course, is also true.
As the dollar strengthens against emerging-market currencies, that currency risk becomes harder to ignore. Every leg down in the rupee eats into dollar returns, raising the incentive to exit.
That dynamic has been in play since early 2025. And with Indian equities losing momentum since late 2024, there has been little in the way of market gains to offset currency losses.
The result is sustained pressure on the rupee as foreign investors pull back. That pressure is unlikely to ease until investors regain confidence that equity returns can more than compensate for currency depreciation.
Geopolitical risks and crude oil: The war in West Asia as dampened global risk appetite, delaying fresh inflows into emerging markets, including India.
It has also pushed up crude oil prices, India’s largest import, adding another layer of strain on the currency. A resolution to the conflict could ease both pressures: revive risk appetite and soften oil prices, offering some support to the rupee.
Imported inflation: India imports more than it exports, making it vulnerable to currency weakness. Because most global trade is invoiced in US dollars, a weaker rupee raises the cost of imports, even if volumes don’t change. That’s imported inflation.
The impact is broad-based: crude oil, natural gas, minerals, machinery, electronics and chemicals all become more expensive.
This complicates inflation management. For essentials like fuel, demand is relatively inelastic, consumption doesn’t fall much even as prices rise. So a weaker rupee feeds directly into higher domestic costs.
Imported inflation is already adding to domestic price pressures, tightening the squeeze on households.
What will shape the rupee’s path?
The currency’s trajectory will depend on a mix of structural and cyclical factors: growth, exports, manufacturing strength, oil prices and, crucially, capital flows.
Foreign inflows matter. A shift from outflows to inflows could stabilise—or even reverse—the rupee’s decline. But they are only one piece of a larger puzzle.
Policy will also play a role. The Reserve Bank of India has so far tolerated gradual depreciation, intervening mainly to curb volatility rather than defend specific levels.
Any change in that approach would be consequential.
The bottom line
Rupee weakness can weigh on market sentiment in the short term, especially in sectors sensitive to currency and commodity moves.
But over longer horizons, corporate fundamentals—not exchange rates—drive equity returns.
For investors holding fundamentally strong companies at reasonable valuations, currency volatility is a variable to track, not a thesis to anchor on.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com