The rupee’s slide to record lows has brought the 95-per-dollar mark into focus, as persistent external pressures-from elevated crude oil prices and geopolitical tensions in West Asia to sustained capital outflows-continue to weigh on the currency. With the Reserve Bank of India balancing multiple policy trade-offs, the outlook points to a calibrated depreciation path rather than an aggressive defence, raising questions on how close the rupee is to breaching 95 and what could shape its trajectory ahead
How close is the rupee to the 95 mark?
The rupee has already weakened to a record closing low of 94.05 and has been trading in a tight but weak range of roughly 93.25-94.25. The sustained pressure from external factors suggests that the 95 per dollar level is now within reach if current conditions persist.
What triggered the latest fall in the rupee?
The latest decline has been driven by heavy foreign institutional investor outflows, with net equity selling remaining elevated, alongside persistent geopolitical tensions in West Asia. Month-end dollar demand has also kept bids firm, even as global cues such as a softer dollar index and a fall in crude oil prices offered limited support.
Why did positive domestic cues fail to support the rupee?
Despite a strong rally in domestic equities and a weaker dollar index, the rupee remained under pressure due to underlying demand for dollars linked to outflows and trade-related payments. This reflects the dominance of balance of payments pressures over short-term market sentiment.
How critical are crude oil prices to the rupee outlook?
Crude oil is central to the rupee’s trajectory. Prices surged to as high as $119 per barrel following geopolitical escalation and remain elevated near $100, significantly above pre-conflict levels. If prices sustain around $110 per barrel, the rupee could weaken toward 95, as higher oil costs directly inflate India’s import bill.
How does this affect India’s current account deficit?
Higher energy prices are expected to widen the current account deficit to around 2.6% of GDP in FY27 from earlier estimates of about 1.6%. India’s structural trade deficit, driven by higher imports than exports, creates a persistent demand for dollars, which intensifies when oil prices rise.
Are capital flows worsening the situation?
Yes, capital flows have become a key pressure point. Foreign portfolio investors have been consistent sellers, with large outflows recorded in recent periods. Net foreign-currency non-resident inflows have also slowed sharply, weakening a crucial source of external financing and contributing to a projected balance of payments deficit.
What role do remittances and external disruptions play?
Remittance flows from West Asia, an important support for India’s external account, may face disruption if the conflict persists. This adds another layer of pressure on the current account, compounding the impact of higher oil imports.
What is the ‘impossible trinity’ and how is it shaping RBI’s rupee strategy?
The “impossible trinity” refers to the trade-off between maintaining exchange rate stability, allowing free capital flows and retaining independent monetary policy-an economy can effectively achieve only two of these at a time. In the current environment of volatile capital flows and external shocks, the Reserve Bank of India is prioritising monetary flexibility and capital mobility, which limits its ability to tightly defend the exchange rate. As a result, the central bank is allowing a calibrated depreciation of the rupee while intervening selectively to smooth volatility, rather than attempting to hold a fixed level such as 94 or 95
How is the Reserve Bank of India responding to these pressures?
The Reserve Bank of India has been actively intervening in the foreign exchange market through spot and forward operations to manage volatility. It has also injected liquidity via open market operations, including significant government bond purchases, to offset the liquidity impact of dollar sales.
What constraints does the RBI face in defending the rupee?
While foreign exchange reserves remain adequate, sustained intervention has already led to sizeable drawdowns. Import cover is expected to decline over time, and a large forward book limits the RBI’s flexibility to intervene aggressively. These constraints reduce the scope for defending any specific exchange rate level.
Why is the RBI likely to opt for calibrated depreciation?
The RBI is effectively navigating the trade-offs between exchange rate stability, capital flows and domestic monetary policy. Allowing a gradual, controlled depreciation helps preserve reserves, maintain liquidity conditions and avoid disruptive market interventions. As external pressures persist, this approach is likely to continue, with the rupee following a measured depreciation path that could see it test 95 if oil prices remain elevated and capital outflows continue.
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