Why Is the Rupee Trading Near Record Lows and What Comes Next?
The Indian rupee is once again hovering dangerously close to record low levels near the 91 per US dollar mark. While this may appear alarming at first glance, currency movements are rarely driven by a single factor. Instead, they reflect a complex interaction of global capital flows, domestic liquidity, bond market dynamics, central bank actions, and geopolitical risk.
When a currency weakens persistently, it is often tempting to attribute the move to short-term speculation. However, the current phase of rupee weakness is structural in nature, shaped by global risk aversion, sustained foreign institutional investor (FII) selling, and uncertainty surrounding macro and policy triggers. Understanding these forces is critical for investors, traders, and policymakers alike.
Currency markets are forward-looking. They react not only to what has happened, but to what may happen next.
Capital Outflows: The Primary Pressure Point
One of the most persistent pressures on the rupee has been capital outflows. Foreign investors have remained net sellers in Indian cash markets for ten consecutive sessions. This sustained selling is not incidental. It reflects a global portfolio rebalancing in favour of perceived safety, particularly US assets.
As global yields remain elevated and geopolitical uncertainty rises, emerging market currencies tend to face stress. Capital moves toward the US dollar, which continues to benefit from its safe-haven status. For India, this translates into steady dollar demand and pressure on the domestic currency.
Bond Markets and the State Debt Supply Factor
Another underappreciated factor is the bond market. Recent declines in bond yields have been driven by expectations of lower state government debt supply. While falling yields are generally positive for equity valuations, they can also signal shifting liquidity dynamics.
Lower yields reduce the relative attractiveness of rupee-denominated fixed income assets for foreign investors. This can indirectly contribute to capital outflows, particularly when global alternatives offer higher real returns with lower perceived risk.
Bond yields and currency stability are more closely linked than most investors realise.
US–India Trade Deal Overhang
Another layer of uncertainty comes from the incomplete US–India trade agreement. Markets dislike ambiguity, and the absence of clarity on trade terms creates an overhang on capital flows. Any perception of unfavourable trade outcomes can weigh on export competitiveness and external account expectations.
Until greater visibility emerges, traders are likely to remain cautious, preferring to stay underweight emerging market currencies, including the rupee.
Global Risk-Off Sentiment and Dollar Strength
The broader backdrop is clearly risk-off. Global equity markets have turned volatile, precious metals have surged, and cryptocurrencies have seen sharp drawdowns before partial recoveries. This is classic risk aversion behaviour.
In such environments, the US dollar strengthens almost by default. Even fundamentally strong emerging economies are not spared. The rupee’s weakness, therefore, must be seen in a global context rather than as a purely domestic failure.
RBI’s Role: Intervention and Market Signalling
Traders indicate that the Reserve Bank of India has been actively selling dollars in the foreign exchange market to smooth volatility. This is a crucial distinction. The RBI is not defending a specific level, but rather ensuring orderly market conditions.
When the 91 per dollar level was breached, the market closely watched RBI behaviour. Historical reference points highlight how sensitive this zone has been:
🔹 Jan 20: 91.06
🔹 Jan 19: 91.00
🔹 Dec 16: 91.08 (previous lowest levels)
These levels matter psychologically. A decisive move beyond them can trigger stop-losses and speculative momentum. RBI intervention acts as a circuit breaker, slowing the pace of depreciation and anchoring expectations.
What Happens Next: Key Triggers Ahead
Looking ahead, several factors will determine the rupee’s trajectory. RBI intervention is likely to continue if volatility spikes. Additionally, Open Market Operations (OMO) purchases by the RBI, scheduled later this week, could inject liquidity and influence bond yields.
However, the most significant domestic trigger will be the Union Budget. Fiscal discipline, capital expenditure allocation, and borrowing assumptions will shape investor confidence. Globally, developments around trade tensions, interest rate expectations, and geopolitical flashpoints will remain decisive.
Currency weakness is not always a crisis. It becomes one only when confidence breaks.
Implications for Investors and Businesses
A weaker rupee has mixed implications. Export-oriented sectors may benefit from improved competitiveness, while import-heavy businesses face margin pressure. For investors, currency moves influence foreign flows, inflation expectations, and asset allocation decisions.
The key is to separate noise from signal. Temporary depreciation driven by global risk-off conditions does not necessarily undermine India’s long-term growth story. However, sustained weakness without policy credibility can.
Investor Takeaway
Derivative Pro & Nifty Expert Gulshan Khera, CFP®, believes that currency movements should be viewed through a strategic lens rather than emotional reaction. A disciplined investor tracks capital flows, central bank intent, and macro triggers while positioning portfolios for volatility rather than fearing it. Deeper market insights and structured guidance are available at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
