Introduction
The Indian rupee falling to an all time low near 91.70 against the US dollar marks a defining moment in the nation’s financial history. This sharp depreciation reflects not just domestic economic pressures but also powerful global forces shaping currency markets worldwide. From geopolitical disputes and shifting interest rate expectations to foreign portfolio investor outflows and the unwinding of global carry trades, the rupee’s weakness is a product of multiple overlapping risks. Understanding this decline requires looking beyond the exchange rate itself and examining how international politics, capital flows, trade balances, and monetary policy interact in an increasingly interconnected global economy.
Global Risk Aversion And Geopolitical Tensions
One of the biggest triggers behind the rupee’s slide has been the surge in global risk aversion caused by geopolitical uncertainty. When major powers engage in disputes or signal trade or strategic confrontation, investors instinctively move toward safety. In such periods, the US dollar strengthens because it is viewed as the world’s primary reserve currency and a safe haven asset. As the dollar rises, most emerging market currencies weaken, including the Indian rupee.
Geopolitical tensions related to territorial disputes and trade policy concerns have unsettled global markets. These tensions increase fear of economic disruption and reduced global trade flows. When uncertainty rises, investors pull money out of riskier markets and place it in assets perceived as more stable. This shift leads to capital outflows from countries like India and increases demand for dollars. As dollar demand rises and rupee supply increases, the rupee naturally weakens.
The result is a self reinforcing cycle. A weaker rupee makes investors more cautious, which leads to further outflows, pushing the currency down even more. This kind of environment is especially damaging for emerging markets that rely on foreign capital to fund growth and maintain balance in their external accounts.
Foreign Portfolio Investor Sell Offs And Capital Flight
Another major reason behind the rupee’s decline has been aggressive selling by foreign portfolio investors in Indian equity and bond markets. FPIs move large amounts of money across borders based on global interest rates, growth expectations, and risk sentiment. When investors believe global conditions are worsening or that better opportunities exist elsewhere, they reduce exposure to emerging markets.
In recent months, foreign investors have sold billions of dollars worth of Indian assets. These sales require conversion of rupees into dollars, increasing dollar demand and weakening the rupee. Unlike foreign direct investment, which is long term and stable, portfolio flows are highly sensitive and volatile. A sudden change in sentiment can lead to large currency moves in a short time.
FPIs have also been responding to higher interest rates in developed economies. When US bond yields rise, investors can earn better returns in dollars without taking on emerging market risk. This makes Indian assets less attractive relative to US assets, accelerating capital outflows and adding pressure on the rupee.
Yen Carry Trade Unwinding And Global Rate Shifts
The unwinding of yen carry trades has played a significant role in weakening the rupee and other emerging market currencies. A carry trade involves borrowing in a low interest rate currency such as the Japanese yen and investing in higher yielding assets elsewhere. For years, investors borrowed cheaply in yen and invested in markets like India to earn higher returns.
However, when interest rates in Japan began rising and global volatility increased, this strategy became riskier. Investors started closing their carry trade positions by selling emerging market assets and repaying yen loans. This process required selling rupees and buying yen and dollars, putting additional pressure on the rupee.
The unwinding of carry trades often leads to sudden currency moves because the positions involved are large and leveraged. When many investors exit at once, currencies like the rupee can weaken rapidly even if domestic fundamentals remain relatively stable.
Rising Import Costs And Trade Deficit Pressure
India is a large importer of energy, gold, and industrial raw materials. When the rupee weakens, the cost of these imports rises in rupee terms. At the same time, strong domestic demand keeps import volumes high. This combination widens the trade deficit and increases demand for foreign currency.
A widening trade deficit means more dollars are needed to pay for imports than are earned from exports. This imbalance puts continuous pressure on the rupee. Even when exports benefit from a weaker currency, they often take time to respond, while import payments are immediate.
High oil prices are particularly damaging for the rupee. Since India imports most of its crude oil, any rise in oil prices combined with a weak rupee significantly increases the country’s import bill. This forces refiners and energy companies to buy more dollars, further weakening the currency.
Domestic Equity Markets And Investor Sentiment
The rupee’s fall has also been linked to weakness in domestic equity markets. When stock indices decline, foreign investors often reduce exposure, leading to further capital outflows. Currency and equity markets influence each other closely. A falling rupee hurts foreign investors’ returns when converted back into dollars, making them more likely to exit.
At the same time, a falling currency can increase inflation concerns, which affect corporate earnings and consumer demand. This can lead to lower stock prices and weaker economic outlooks. The interaction between equity weakness and currency depreciation creates a feedback loop that amplifies volatility.
Role Of The Reserve Bank Of India
The Reserve Bank of India plays a central role in managing currency volatility. While the RBI does not target a specific exchange rate, it intervenes to prevent disorderly market conditions. In the recent period, the RBI allowed the rupee to find its level rather than aggressively defending it.
This approach reflects a long term strategy. Using foreign exchange reserves to protect a particular number can be costly and unsustainable. Instead, the RBI focuses on smoothing excessive volatility while preserving reserves for genuine crises. The central bank also uses forward market operations and liquidity tools to manage dollar supply without distorting market signals.
However, when global forces are strong, even the RBI’s actions can only slow the decline, not stop it completely. The rupee’s fall to 91.70 reflects the scale of global pressures rather than a loss of domestic policy control.
Inflation Risks And Impact On Consumers
A weaker rupee increases the cost of imported goods, especially fuel, electronics, and edible oils. These higher costs eventually pass through to consumers in the form of higher prices. If inflation rises, it reduces purchasing power and can force the RBI to maintain tight monetary policy for longer.
Higher inflation also affects government finances by increasing subsidy costs and interest expenses. For businesses, a weak rupee raises input costs but can improve export competitiveness. This creates winners and losers across the economy.
Benefits For Exporters And Services Sector
While a falling rupee is painful for importers and consumers, it can benefit exporters. Indian IT services, pharmaceuticals, textiles, and manufacturing companies earn revenue in dollars but pay many costs in rupees. A weaker rupee increases their profit margins when foreign earnings are converted back into domestic currency.
This advantage can support corporate earnings and partially offset weakness in domestic demand. However, global growth conditions still matter. If the world economy slows, even a weak rupee cannot fully protect export volumes.
Long Term Outlook For The Rupee
The future path of the rupee depends on several factors. Global risk sentiment, US interest rate policy, geopolitical developments, oil prices, and capital flows will all play a role. If global tensions ease and investors regain confidence in emerging markets, capital could return to India, supporting the rupee.
On the domestic side, strong economic growth, controlled inflation, and stable fiscal policy will help restore confidence. Structural reforms, rising foreign direct investment, and a narrowing trade deficit would also strengthen the rupee over time.
However, as long as global uncertainty remains high and the dollar stays strong, the rupee is likely to remain under pressure with periods of volatility.
Conclusion
The Indian rupee hitting a record low of 91.70 against the US dollar is the result of a powerful combination of global and domestic forces. Geopolitical tensions, foreign investor sell offs, yen carry trade unwinding, rising import bills, and shifting interest rate expectations have all contributed to this historic move.
While the decline presents challenges in the form of higher inflation and import costs, it also offers opportunities for exporters and globally focused companies. The Reserve Bank of India continues to manage volatility while allowing market forces to operate. Ultimately, the rupee’s journey reflects the reality of a deeply interconnected world where events thousands of miles away can move India’s currency in minutes.
