Rupee Declines Against US Dollar Amid Market Uncertainty

The rupee falling against the dollar has been one of India Inc.'s major concerns for quite some time now, and understandably so. In the first two months of 2025, the rupee has already depreciated more than half the amount in all of 2024. By Feb 28, the rupee had slid by 1.8%, with the decline already more than 1.5% in 2023 and more than half of the 3% in 2024.

Why is the Indian Rupee Falling Against the Dollar?

The rupee falling against dollar is a culmination of several factors. Some of the major reasons that have contributed to the rupee’s fall are:

• The Tariff War
  

Trade wars are never good news. Ever since President Donald Trump assumed charge, he has been on a tariff-levying spree. The US president has signed executive orders imposing high tariffs on Mexican, Canadian, and Chinese imports.

While he acknowledges good relations with India, he has voiced his displeasure with the high tariff India charges. He has even announced reciprocal tariffs from 2nd April. If India faces high tariffs in the US, its exports will take a hit. Fewer dollars flowing in will add more strain on the rupee.

• Foreign Fund Outflows
  

Foreign investors can be unpredictable. One day, they’re pouring money into Indian markets; the next, they’re pulling it all out. Figure this. Foreign investors have withdrawn approximately USD 29 billion from Indian equities since October 2024.

This marks the largest outflow in any six-month period. By withdrawing money from Indian markets, foreign investors are shifting towards Chinese equities at an unprecedented rate. High foreign fund outflow means fewer Dollars, ultimately weakening the rupee.

• Rise in Crude Oil Prices

A strong start in 2025, with benchmark Brent rising to a four-month high gaining 9% in January also contributed to the rupee's decline. Tighter US sanctions on Russian oil and heating demand in western countries due to freezing cold have resulted in price surges.

Note that India imports a massive chunk of its oil. When crude oil prices shoot up, India has to shell out more dollars to buy the same amount of oil. This puts pressure on the rupee, making it weaker.

RBI Steps and the Way Forward

While the RBI has been proactive in shoring up the rupee by selling dollars, global volatility and uncertainty still loom large. The Russia-Ukraine conflict is still ongoing, and the truce between Hamas and Israel seems to have come to an end with fresh strikes by the Israeli Defence Forces.

As an investor, you must remain guarded and diversify your investments beyond domestic territories to prevent erosion in value due to the declining rupee. It’s also vital for you to remain patient and avoid hasty decisions.

Conclusion

While the declining rupee is a cause of concern, remember that the rupee has a history of bouncing back strongly. The Indian economy and financial markets are resilient enough to overcome the situation and emerge stronger.