Rupee slides past 86 a dollar: Key factors behind the slide

Weak portfolio flows and bearish speculator activity have further compounded the rupee's weakness.

The Indian rupee hit a lifetime low of 86.31 against the US dollar on Monday, marking its second consecutive session of losses. Several domestic and global factors have driven this sharp depreciation.

Here are the key reasons:

• Higher US bond yields, with the 10-year yield at 4.71 percent, have also added pressure on emerging market currencies, including the rupee.
• Rising crude oil prices have widened India’s trade deficit, putting additional pressure on the rupee.
• Weakness in other Asian currencies has amplified the decline as emerging markets face broader economic challenges.
• A stronger-than-expected US jobs report and positive data on US services and manufacturing have bolstered the dollar.
• Foreign investors have withdrawn over $4 billion from Indian equities in January 2025 alone, following $11 billion in outflows last quarter.
• Weak portfolio flows and bearish speculator activity have further compounded the rupee's weakness.
• The rupee's real effective exchange rate (REER) indicates it is overvalued, making Indian exports less competitive. Analysts note the rupee is at its most overvalued level in two decades based on a 40-currency trade-weighted REER.
• The uncertainty around Trump's planned policies has added a layer of risk, increasing hedging activity and speculative bets against the rupee.
• A potential leadership change at the Reserve Bank of India has fuelled expectations of a shift towards a more flexible exchange rate policy.