Indian Rupee Set for Largest Annual Drop in Three Years Amid Record Equity Outflows and Trade Uncertainty

The Indian rupee is heading for its steepest annual decline in three years, pressured by record foreign equity outflows and the absence of a U.S.-India trade deal, leaving it behind a broader rally seen across Asian currencies.

As of 10 a.m. IST on Wednesday, the rupee was trading at 89.8650 per U.S. dollar, marking a 4.74% depreciation for 2025, its worst annual performance since 2022, when the currency fell nearly 10%. Throughout the year, the rupee repeatedly touched record lows, once slipping past the 91-per-dollar mark, reflecting sustained depreciation pressures.

Capital Flows Drive Rupee Weakness

Economists highlight that the rupee’s underperformance has been driven primarily by capital flow dynamics. Gaura Sen Gupta, an economist at IDFC First Bank, noted, “The rupee's performance this year was largely a capital-flow story, with the RBI adopting a more pragmatic and flexible approach to the exchange rate and allowing the currency to weaken.”

India’s balance of payments recorded a deficit of around $22 billion between April and November 2025, the largest in its history, signaling external vulnerabilities. A potential trade agreement with the U.S. could provide temporary relief, potentially lifting the rupee to 88.50 per dollar by March, before structural pressures reassert themselves, according to Sen Gupta and a Reuters poll.

Contrasting Context With 2022

Unlike 2022, when aggressive U.S. Federal Reserve rate hikes drove a dollar rally that weakened most global currencies, 2025 saw a declining dollar index, down roughly 9.5% following Fed rate cuts and restrictive U.S. trade policy. This backdrop supported many Asian currencies, but India’s rupee lagged due to record FPI outflows of $18 billion from equities and subdued inflows in debt, external commercial borrowing, and foreign direct investment.

Prolonged U.S.-India trade negotiations also contributed to capital flow uncertainty, reducing predictability for investors and dampening demand for the rupee.

RBI’s Evolving Stance

The Reserve Bank of India (RBI) shifted its approach to currency management under Governor Sanjay Malhotra, who took office in December 2024. The central bank has focused on managing depreciation expectations and curbing one-sided speculative positions rather than defending a specific exchange rate.

This strategy was evident in mid-December, when the rupee briefly fell past 91 per dollar. The RBI intervened heavily to curb speculative pressures but did not attempt to peg the currency, signaling tolerance for a weaker rupee to restore market balance.

Rupee Valuation and Export Implications

Despite its sharp decline, the rupee’s depreciation has improved competitiveness. India’s trade-weighted real effective exchange rate (REER) dropped to 97.5 in November 2025 from 104.7 in January, moving the currency from overvalued to mildly undervalued territory.

Economists, including Dhiraj Nim, FX strategist at ANZ Bank, suggest that a moderately weaker rupee can help exporters mitigate the impact of U.S. tariffs, cushioning earnings in local currency terms. “A calibrated path towards a mildly undervalued rupee over the medium term will provide relief to impacted Indian exporters,” Nim said.

Outlook

The rupee’s performance in 2025 underscores the interplay between global capital flows, trade negotiations, and domestic policy frameworks. While near-term relief could come from a potential U.S.-India trade deal, structural pressures such as persistent equity outflows, tariff-related uncertainties, and global market volatility suggest that the rupee may continue to face headwinds in the months ahead.

Analysts recommend close monitoring of capital flows, RBI interventions, and international trade developments as key determinants of the rupee’s trajectory into 2026.