Context:

In recent times, the Indian rupee has reached fresh lows versus the U.S. dollar, reflecting pressure from both external and domestic dynamics. On September 23, the rupee fell to around ₹88.62 per dollar, its weakest on record.

What determines the USD/INR exchange rate?

The exchange rate is mainly determined by the supply and demand for US dollars versus Indian rupees in the foreign exchange market:

·         Supply of USD: Export earnings, foreign investments (FDI and portfolio), remittances, and RBI dollar sales.

·         Demand for USD: Payments for imports, foreign investors withdrawing capital, debt repayments, and holding dollars for business or investment.

If demand for USD exceeds supply, the rupee depreciates (weakens). If supply exceeds demand, the rupee appreciates (strengthens).

Key Drivers of the Weakness:

Trade Imbalance & Current Account Deficit:

• • Import dependence, especially on oil and raw materials
    India imports the majority of its crude oil, and also relies heavily on imports for fertilizers, electronics, and capital goods. The higher import bills translate into greater demand for foreign currency.
  • Sluggish export growth & external shocks
    Global demand has softened, and protectionist trade policies (e.g., U.S. tariffs) have added headwinds. In this environment, export growth struggles to keep pace with rising import bills.
  • Current account pressures
    Owing to the gap between imports and exports, India often runs a current account deficit (CAD). When CAD widens, net demand for foreign exchange exceeds inflows, putting downward pressure on the rupee.

Sluggish Capital / Investment Inflows:

• • Foreign Portfolio Outflows
    A major contributor has been the withdrawal of foreign funds from Indian equities and bonds. In 2025, foreign institutional investors (FIIs) have been net sellers, contributing to rupee depreciation as these investors convert rupee assets into dollars.
  • Risk aversion & yield differentials
    As global risk sentiment tilts toward safer assets (e.g., U.S. Treasuries), capital often flows out of emerging markets. The U.S. Federal Reserve’s tighter monetary policy has made dollar‑denominated assets more attractive, drawing away capital.

Impacts:

• A weaker rupee means that imports become more expensive. For a heavily import‑reliant economy in energy and raw materials, this can push up inflation.
• To stabilize or support the rupee, the RBI may have to use reserves or engage in intervening in the forex market, which has costs and risks.
• As the currency weakens, servicing external debt (if denominated in foreign currency) becomes costlier in rupee terms.

Conclusion:

The rupee’s recent depreciation is not merely a short‑term fluctuation, but the outcome of structural imbalances and external pressures. A persistent trade deficit, weak capital inflows, and a dominant dollar in a tightening global financial regime create a challenging environment for the rupee.

Stabilizing the currency will require a multi‑pronged approach: reviving exports, attracting stable investment, careful central bank management, and structural reforms to reduce dependence on vulnerable imports. Unless these pressures are addressed, the rupee may remain under strain, with implications for inflation, external stability, and economic growth.