The Indian rupee has breached the psychological barrier of 91 to the US dollar, marking a lifetime low and depreciating nearly 6% in 2025 alone. This makes it one of the worst-performing emerging market currencies globally, surpassed only by the Turkish lira and Argentine peso. Among Asian peers, the rupee sits at the bottom, reflecting a persistent "slow grinding slide" rather than a sudden panic. At the start of the year, the currency traded around 85.64 to the dollar. The sharp decline has been fueled by heavy foreign portfolio investor (FPI) outflows, with nearly $32 billion withdrawn from Indian equities this year.

Weakened foreign direct investment (FDI) and ongoing uncertainties in US-India trade negotiations have compounded the pressure, exacerbated by fresh US tariffs and intensifying global trade tensions. Market watchers note fading confidence in a swift recovery, as foreign investors continue to exit. In December alone, outflows have already approached $3 billion, marking one of the largest monthly withdrawals of the year. The Reserve Bank of India (RBI) has adopted a nuanced approach, intervening through open market operations and injecting dollars into spot and forward markets to smooth volatility.

However, it has refrained from aggressively defending any specific level. Pre-committed dollar liabilities have risen to a five-month high of $63 billion, signalling greater currency flexibility. The International Monetary Fund (IMF) recently reclassified India's exchange rate regime as a "crawl-like arrangement," moving away from the tightly managed float of the past. Experts debate whether the rupee's fall stems from weakening fundamentals or a deliberate policy choice prioritizing growth, exports, and reserve conservation over rigid stability. Yet, November trade figures provided a bright spot: merchandise exports surged 19.4% year-on-year to $38.13 billion—the highest in over a decade—while imports dipped 1.9%, narrowing the goods trade deficit to a five-month low of $24.53 billion from October's record $41.68 billion. Exports to the US grew robustly in double digits despite tariffs, highlighting resilience.

A senior functionary of a private bank noted the surprise export rebound, driven by lower gold imports and seasonal factors. They expect the current account deficit(excess of imports over exports) to remain manageable at around 1.4% of GDP for the year, with a likely balance-of-payments surplus(more money coming into the money than money going out in various forms) in the coming quarter providing external stability. A top executive of a securities trading firm highlighted three key pressures: negative sentiment from delayed US-India trade deals, relentless FPI outflows, and a challenging global backdrop including rising US bond yields and yen carry trade unwinding.

Another executive of an advisory and consultant firm described the move as technically overdone, driven by outflows and importer panic, but emphasized strong fundamentals like 8.2% growth and improving trade data. He suggested the RBI is taking a muted stance to avoid draining reserves ineffectively, anticipating stabilization as year-end selling eases. A former RBI executive director defended the central bank's hands-off approach to volatility, calling it appropriate.

She noted seasonal year-end FPI repatriation, importer hedging rushes, and leads-and-lags effects, while dismissing comparisons to crisis-hit economies like Turkey or Argentina. India's political stability, manageable external debt, and contract enforcement make it fundamentally distinct from 1990s-era vulnerabilities.Another financial expert argued that some depreciation acts as a natural adjustment after years of rupee overvaluation.

It could serve as an automatic stabilizer amid relative loss of export competitiveness due to higher US tariffs on India compared to Asian peers. While acknowledging short-term inflationary risks and investor unease, she viewed the RBI's strategy as balanced, potentially aiding medium-term export gains in a global trade war environment.

As negotiations with the US remain unresolved—potentially dragging into the new year—markets await signals of tariff relief or deal progress. A resolution could trigger a sharp rebound, experts agree. For now, the rupee's trajectory tests India's economic resilience, with policymakers navigating a delicate balance between competitiveness and stability in an uncertain global landscape. A trade deal resolution could remove a major overhang, potentially triggering inflows and a rebound. Officials indicate India and the US are "very close" to an initial framework, though timelines remain fluid.