New Delhi: The INR’s sharp slide to an intraday low of 90.14 against the USD has triggered fresh debate over the currency’s fundamentals, with analysts warning that the fall is far deeper than the usual “USD-strong, INR-weak” narrative. Instead, a series of domestic and external shocks, including record trade deficits, tariff hits, and heavy FPI exits, have combined to push the Rupee to its weakest zone ever.
While the USD has strengthened nearly 10% against major global currencies in 2025, the INR’s 5-6% YTD decline is being attributed primarily to India’s widening macro imbalances. October 2025 data shows the trade deficit ballooning to a historic $41.68B, driven by a sharp 11.8-12% fall in exports and an unprecedented 199-200% surge in gold imports, which touched nearly $15B. The gold spike alone added close to $10B to India’s import bill, intensifying dollar demand at a time when export earnings are shrinking.
Compounding the stress is the US tariff shock. From August 2025, Washington imposed duties of up to 50% on key Indian export categories such as engineering goods, textiles, gems & jewellery, and auto components. As a result, outbound shipments to the US-India’s largest market, fell 8.5-12% in Sept to Oct, wiping out a crucial source of FX inflows.
Economists say this has directly worsened the CAD, which is now expected to widen from 0.6% to ~1.4% of GDP in FY25, raising India’s external funding needs. The situation is further aggravated by a massive FPI outflow of $16-21B this year, driving foreign ownership in Indian equities to a 15-year low. Every exit triggers a chain of selling, equity offloading, INR conversion, and USD purchase, exerting direct downward pressure on the Rupee.
Meanwhile, India’s heavy dependence on imported crude (85-89%) and electronics continues to keep dollar demand elevated. Rising import costs are already spilling into prices, inflation, and corporate margins. According to RBI estimates, every 5% fall in INR adds 30–35 bps to inflation, limiting the central bank’s space to cut rates.
Interestingly, the RBI has refrained from aggressively defending the currency despite holding $688B in reserves, allowing the INR to move from its earlier “managed” band of 83-84 to a market-driven zone near 90.
Looking ahead, analysts outline three possible scenarios for 2026. In the bear case, absent a US trade deal and with oil elevated, the INR could slip to 91-93. A base-case outcome suggests stabilization in the 88-91 band, while a bull case with tariff relief and a softer USD could see the currency claw back to 86-88.
Key variables to watch include US-India trade negotiations, global oil prices, and the return of positive FPI flows, all of which may determine whether the Rupee stabilizes or continues its downward drift.
