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Why is the Indian rupee depreciating against the US dollar? Discover the surprising reasons behind this trend and its impact on the economy. Learn more now.
The Indian rupee is hitting new lows every other day as the US dollar soars high due to global economic impacts. Since Donald Trump won the US elections, global financial uncertainty and inflation concerns have risen among investors.
If you, like many of us, have been wondering what’s causing this financial trend, then we’ve got you covered.
What’s Causing the Weakening of the INR?
As opposed to the buying trend of $1.8 billion in December 2024, offshore investors sold $2.8 billion worth of equity in January 2025.
Due to financial uncertainty, the investors moved towards the safer US dollar over other risky investment options.
Oil prices rose tremendously globally due to concerns over US sanctions on Russia potentially reducing the supply of crude oil. At the same time, dollar-based investment became more attractive due to the rising US government bond yields.
Following the strong growth shown in the latest job data, the 10-year US Treasury yields were the highest since November 2023. In December 2024, the US added 256,000 jobs, the most since March 2024.
The higher US yields have instigated the investors to exit risky investment assets, negatively impacting Indian equity indexes, the BSE Sensex, and the Nifty50.
FOreign investors have also retreated from their Indian investments and have sold over $4 billion in domestic stocks and bonds since January.
RBI’s Course of Action
Currently, the Reserve Bank of India has very limited options to stop the downfall of the rupee against the US dollar due to major geopolitical factors.
The RBI could push for selling dollars in the local market to support the rupee, however, the traders do not see this happening anytime soon.
According to Anil Kumar Bhansali, executive director of Finrex Treasury Advisors, RBI interventions have declined by half in January 2025 as compared to December 2024.
He says,
“The key reason is RBI's assessment the local currency may be overvalued, so they have the comfort of letting the rupee depreciate further.
The RBI had accumulated short positions in the dollar, which they are slowly unwinding since end December.”
