The rupee at 100? Why fear may be trumping fundamentals
The Indian economy is in decent health, with no obvious trigger for a sharp depreciation. Past episodes of rupee weakness have usually been caused by economic problems, both domestic and external. So, what’s going on now?
New Delhi: Forecasting the rupee-dollar exchange rate is a tough ask at the best of times. In a world of Trumpian volatility, it is near impossible. Between 5 November 2024, when Donald Trump was re-elected as the US president, and 21 October 2025, the rupee has lost over 4% against the US dollar. While that’s a steep drop, it is nowhere close to the rupee’s worst performance. On average, the rupee falls about 2-3% against the dollar annually; in crisis years, the depreciation is much higher. Yet, the current weakening of the rupee has generated a great deal of discussion and concern. This can be attributed to two reasons.
One, an exchange rate of 100 rupees to a dollar is an important psychological barrier: as the rate approaches 100, there is a sense that the rupee as a currency has collapsed. This is simply irrational.
To see why, consider past trends. In April 2008, the rupee was valued at about 40 to a dollar. By July 2014, about six years later, it was valued at 60—a 50% depreciation. More than a decade later, another 50% depreciation—which would push the rupee to 90—appears imminent. So, the weakening of the rupee has been steady and on-trend, rather than sudden and chaotic.
Two, the Indian economy is in decent health, with no obvious trigger for a sharp depreciation. Past episodes of rupee weakness have usually been caused by economic problems, both domestic and external. In 2009, the rupee depreciated by over 10% as the global financial crisis threatened growth and led to a pullout of foreign capital from emerging markets. The years of 2012 and 2013 saw low growth, high inflation, high fiscal and trade deficits, and the labelling of India as one of the “fragile five" nations.
More recent episodes of rupee erosion have been largely due to external developments. In 2022, the rupee was dragged down by a strengthening dollar and sharp US interest rate hikes, along with the added uncertainty of the Russia-Ukraine war. This trend continued in 2023 as conflict in the middle-east added to global uncertainties.
Macroeconomic stability
Emerging from the covid-19 pandemic and into an external environment fraught with uncertainty, India has managed to stay on a stable economic footing. The two macro indicators that troubled India in 2013—fiscal deficit and inflation—are well under control.
The central government’s fiscal deficit, which had gone up to 9.2% of the gross domestic product (GDP) in 2020-21 owing to pandemic alleviation measures, is now down to below 4.5% of GDP, largely on the back of improved tax collections. Inflation, as measured by the Consumer Price Index, was above the RBI’s tolerance level of 6% year-on-year through most of 2022-23, and higher than the 4% target in 2023-24, but has since dropped to sub-4% levels. The current account deficit is expected to be less than 1% of GDP in 2025-26, which is remarkably low for a crude-importing nation like India.
An interest rate cut cycle is currently underway. The benchmark repo rate has been cut by 1 percentage point this year. Along with monetary easing, the government has also loosened fiscal policy. An income tax cut and a broad-based reduction in the goods and services tax (GST) are expected to boost purchasing power and consumption for ordinary households.
The economy grew 6.5% in 2024-25, and by 7.8% during the April-June 2025 quarter. India’s growth performance and policy support measures have not gone unnoticed. Three rating agencies have upgraded India’s sovereign ratings this year, most notably S&P ratings, which upgraded India from BBB minus to BBB within days of Trump’s punitive tariff announcement. And the International Monetary Fund (IMF) has raised its India growth forecast for 2025 from 6.4% to 6.6%.
Clearly, our macroeconomic score card is stellar. India is among the best all-round emerging markets performers this year, a fact that is mentioned often in the media and at official briefings. That is why the rupee’s decline is puzzling.
Currency calculus
Not only has the rupee weakened, but to add insult to injury, this has happened when the dollar itself has broadly weakened. Between January and October, the DXY dollar index declined by 10%, while the rupee declined by 2.5%. In contrast, some emerging market currencies—such as the Vietnamese Dong, Brazilian Real and Mexican Peso—have appreciated in value.
So, why has the rupee lost ground despite sound economic fundamentals?
At its core, the rupee-dollar exchange rate depends on the actual and expected demand and supply of dollars in forex markets. To be sure, economic factors play a role, but only through their impact on dollar demand and supply. If the demand for dollars is more than supply, the rupee is likely to depreciate against the dollar. If the supply of dollars is more than demand, the rupee is likely to appreciate against the dollar. That’s the underlying theory.
But exchange-rate determination in the real world is far more complicated, because future demand and supply have to be estimated based on current available information. The more uncertain the present situation, the harder it is to estimate future conditions accurately. Under the kind of extreme uncertainty that the world is facing today, it is natural that markets are risk-averse and take a cautious, even pessimistic, view of the rupee.
Consider India’s international balance of payments (BoP), which is the record of India’s transactions with the rest of the world. The BoP consists of the current account (exports, imports, remittances) and capital account (flows of foreign capital via debt, equity and aid). Historically, India has run a deficit on the current account, as its imports are higher than its exports, which means it owes dollars to the rest of the world. In the past, this shortage was made up by a surplus on the capital account arising from net inflows of foreign direct investment (FDI) and foreign portfolio investment (FPI). Simply put, surplus capital flows financed the current account deficit.
Past episodes of sharp rupee depreciation were often associated with rising current account deficits, with the rupee weakening on fears that capital inflows would be insufficient to fund the deficit (2013, 2018). But this year, the situation has flipped: despite the low current account deficit; the rupee is being dragged down by a drop in foreign capital inflows. Between 1 April and 20 October 2025, foreign portfolio investors pulled out $1.3 billion from Indian capital markets. This is not unusual: FPI flows have turned net negative before, driven by risk re-ratings (2008-09, 2019-20) or in response to a stronger dollar (2021-22, 2022-23).
What is new this time around is the increase in outbound FDI from India. In 2019-20, FDI from India was about $12.9 billion and FDI into India was $43.3 billion. In 2024-25, the quantum of FDI flowing out of India had more than doubled to $28.1 billion (largely due to repatriation of profits), while inward FDI dropped to $29.1 billion. The result was that net FDI was merely $959 million in 2024-25. This is worrying, as India has not seen sub-billion dollar FDI in any year since 1993-94.
Limitation and safeguards
Foreign capital flows have reduced. On the other hand, persistent tariff tensions threaten Indian exports. A recent report from Crisil shows that US-bound merchandise exports contracted by 11% in September despite front loading of shipments (Crisil First Cut, October 2025).
So far, service exports—which are nearly half of India’s total exports—have not been targeted. But given the unpredictability of tariff announcements and the Trump administration’s emphasis on ‘make in America’, the current framework of outsourcing to India cannot be taken for granted.
The impact goes beyond trade. The imposition of a hefty one-time fee on fresh H1B visas and tighter rules for non-immigrant visas indicate that it may become harder to live and work in the US. This matters because the US has been the largest source of remittances, accounting for 27.7% of the remittances that flowed into India in 2023-24. Remittances make a hefty contribution to dollar inflows ($124 billion in 2024-25), and a decline in remittance flows would be a big blow to the current account.
A thinning capital account cushion and a current account exposed to tariff headwinds have soured market sentiment towards the rupee.
The government is working to control the damage. For example, a trade deal with the UK was signed in July, trade negotiations with several nations are ongoing, and non-US export geographies are being actively explored. However, these strategies will show results only in the long term. In the short term, the prevailing atmosphere of uncertainty has hurt the rupee.
So, could bearish market sentiment pull the rupee down to 100 per dollar? The answer is both yes and no. Yes, because even without tariff threats, at a 3% annual rate of depreciation, the exchange rate would hit 100 in less than five years. But no, it is unlikely to reach 100 rapidly, unless something drastic happens, such as a complete breakdown of US-India trade talks, an irreversible escalation in tariffs or a breakout of conflict or war.
Barring these unforeseen circumstances, chances are that recent policy measures to encourage foreign capital inflows will stabilize the rupee. Of these, three measures stand out for their potential to strengthen the capital account.
First, the RBI has released a draft framework to liberalize external commercial borrowing (ECB) norms, which, if implemented, will be a sweeping reform that will enhance dollar inflows via the ECB route. Second, authorities have adopted an easier stance on permitting FDI into banking. In this fiscal year alone, SMBC has acquired 24.9% in Yes Bank, Emirates NBD has agreed to pick up a 60% stake in RBL bank, and Abu Dhabi-based Avenir Investment RSC has agreed to take a 43.46% stake in Sammaan Capital. These deals could open up the banking sector to foreign investment in a big way.
Third, the government and RBI are working together to facilitate greater use of the rupee in international trade and settlement; higher international usage will strengthen the rupee. For instance, India and the UAE signed an agreement in August that is expected to make it easier to settle bilateral trade in Indian rupees.
Perhaps a more pertinent question to ask is not will the rupee reach 100, but what if it does hit 100. A weaker currency is not necessarily a bad thing. A weaker rupee will offset the price impact of tariffs and keep exports price competitive. Meanwhile, the best option is to continue with domestic reforms that promote resilient growth. Robust economic growth is the strongest incentive for foreign capital, and the greatest currency support.
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