ANALYSIS Why India’s strong macros aren't soothing the Rupee?

Indian Rupee

India’s macroeconomic backdrop may be in a sweet spot, with growth surpassing expectations and inflation at historic lows. But that don't seem good enough for our currency.

The rupee remains under pressure, largely due to the recent US tariffs on Indian goods, which have pushed up dollar demand and injected fresh volatility into the exchange rate.

The local currency has surpassed the psychological level of 90 ​on December 3 and today touched another record low 90.5625 against the US dollar. This is despite India’s resilient macroeconomic conditions.

Forex market experts said that the sharp depreciation of the currency is due to the combination of factors including strong demand for the dollar globally, elevated US bond yields, foreign portfolio investor (FPI) outflows from domestic equities, and uncertainty on the trade and geopolitical fronts.

Further, the delay in the trade deal between India and US is adding more pressure to the currency.

The fall of the Indian rupee against the US dollar has picked up pace sharply in the latest leg of its long-term depreciation cycle, when it touched a record low and crossed a psychological mark of 90 against the US dollar.

The domestic currency took just 231 days to slide from the 85 level to the 90 mark, highlighting a much faster erosion compared with earlier levels.

“The rupee depreciated by 1.5% against the dollar over the past month to a record low, primarily due to a widening trade deficit in Oct, subdued investment inflows, and negative sentiment arising from delays in the India–US trade deal,” CareEdge said in a report.

Experts say a weakening currency doesn’t eliminate the negative impact of tariffs, but it acts as a shock absorber, helping exporters stay competitive and preserving trade flows during a tariff war.

They add that the weaker currency makes exports competitive, supports export earnings, and helps maintain trade balance.

Anindya Banerjee, Head of Currency & Commodity Research at Kotak Securities explained that even in a direct trade war, countries often benefit from a weaker currency, but this strategy becomes risky when inflation is already high, depreciation can worsen domestic prices and hurt the economy. India, however, has the advantage of strong real growth and comfortably low inflation at the moment.

In that sense, our concerns are more about nominal growth. A softer rupee can support the external sector, even if currency alone cannot transform export competitiveness. At least it provides some cushion, and importantly, it doesn’t transmit into higher domestic inflation right now, especially with oil prices remaining benign and gradually drifting lower, Banerjee added.

A weakening currency makes imports more expensive because you need more local currency to buy the same amount of foreign goods. When this happens, the cost of imported items—such as crude oil, electronics, chemicals, edible oils, and machinery, rises. These higher import costs eventually feed into overall consumer prices, pushing inflation up.

However, India is unlikely to have much impact on the inflation considering its all-time low inflation.

India’s economy extended its strong run for a third consecutive quarter, growing at a six-quarter high of 8.2 percent in July–September (Q2FY26) compared with 7.8 percent in the previous quarter, helped by robust manufacturing and a buoyant services sector, especially financial, real estate and professional services.

Headline inflation of India remained lower in the last few months due to easing pressure on the food prices. According to the data, inflation which in December 2024, was at 5.22 percent, fell to 4.26 percent in the following month, and then eased again to 3.61 percent in February.

Between July and October, CPI Inflation remained most of the time below the 2 percent threshold band.