Rupee weakness deepens on trade and capital outflows; undervaluation may not last: Report

NEW DELHI: The Indian rupee has continued to display pronounced weakness this financial year, slipping nearly 5 per cent against the US dollar and consistently trading above the 90-per-dollar mark in recent days.

HDFC Tru primer on recent currency movements attributes the depreciation to a confluence of external and domestic pressures, including higher trade tariffs imposed by the US on India, a widening current account deficit, elevated overseas interest rates drawing capital outflows, India’s heavy import dependency, particularly for oil and electronics, and persistent foreign investor selling.

The report highlights that while the rupee’s long-term trajectory has been one of structural depreciation, averaging 4-5 per cent per year over the past five decades, the recent bout of weakness is sharper than the trend of the last few years. The currency has moved from being overvalued in 2024 to a marginally undervalued position in 2025, as reflected by the Real Effective Exchange Rate (REER) falling below 100.

According to the primer, this downturn in REER marks only the fourth instance in the past decade in which the rupee has become undervalued, though historically such episodes have been short-lived. The shift theoretically improves export competitiveness but simultaneously raises import costs, thereby putting additional pressure on inflation-sensitive categories such as fuel, travel, and consumer electronics.

On the policy front, the International Monetary Fund’s assessment that India is operating a “crawl-like arrangement” suggests that the Reserve Bank of India is guiding the rupee along a slow-moving trend line, typically restricting fluctuations to within 2 per cent of this path. The arrangement allows the currency to adjust gradually, predominantly with a mild depreciation bias, while smoothing out disorderly volatility.

Regarding the outlook for the rupee, the report indicates that if historical patterns continue, long-term overseas investors may benefit from the rupee’s structural depreciation, which tends to augment foreign-currency investment returns when converted back into rupees. However, it also underscores that near-term conditions indicate continued pressure on the currency, driven by global financial tightening, elevated import costs, and trade-related headwinds. (ANI)