20 years of the Indian Rupee: Rocky road, steady depreciation

Indian Rupee

The Indian rupee's sharp slide past the 91-per-dollar mark has thrust the currency back into the spotlight, as global tariff tensions, persistent dollar strength and sustained portfolio outflows converge to create one of the steepest depreciation phases in recent years.

What is particularly striking this time is the pace, the currency took just 231 days to fall from 85 to 90, signalling growing stress in the foreign exchange market even as the broader macroeconomic backdrop remains comparatively stable.

Currency watchers point out that the fall has accelerated in the last two quarters, driven by safe-haven demand for the US dollar, elevated US yields, and caution ahead of a potential India-US trade agreement.

As the world’s two largest economies engage in tariff salvos affecting Indian exports, demand for dollars from importers and hedgers has surged, exerting pressure on the rupee.

Despite these headwinds, market veterans underline a key nuance: the rupee's slide, while steep and sentiment-sensitive, has been far more orderly than in past episodes of stress. In earlier cycles, notably the Global Financial Crisis, the taper tantrum era, or the COVID-19 shock, the currency saw abrupt and panic-driven swings marked by sharp reserve drawdowns and severe macro dislocation.

In contrast, today's depreciation, though unsettling for markets, has unfolded against a backdrop of stable banking liquidity, comfortable reserves and measured central bank intervention.

The rapid fall to 91, however, is not merely symbolic. The move cements the rupee's position among Asia’s worst-performing currencies this year, reflecting the stiff external environment rather than a deterioration in domestic fundamentals. Foreign portfolio investors have remained net sellers in equities in recent months, while dollar demand from corporates, particularly for trade hedges has added to the pressure.

Traders say the Reserve Bank of India has acted with restraint, stepping in primarily to smooth volatility rather than defend any specific level. Forward market manoeuvres and calibrated spot operations have helped prevent a disorderly slide, signalling the central bank’s comfort with a gradual depreciation in line with global conditions. That stance has also signalled to the market that macro stability outweighs currency optics.

The fallout is already visible. Importers face rising landed costs, especially for crude and electronics, stoking concerns about imported inflation. Exporters, on the other hand, may find only marginal relief as tariff barriers and weak global demand blunt some of the competitiveness gains typically associated with a softer currency.

Going ahead, the next chapter for the rupee will hinge on three critical variables, the trajectory of India-US trade talks, portfolio flows in the face of elevated US yields, and the central bank’s appetite for intervention if volatility spikes. For now, analysts expect the currency to remain under pressure, but without the market-wide panic that characterised earlier crashes.