India’s central bank will tolerate a weaker rupee as the country’s external sector faces multiple challenges, including a wider trade gap and the stalling of dollar inflows into the world’s fifth-largest economy, according to three sources familiar with the central bank’s strategy who spoke to Reuters.
The Reserve Bank of India (RBI), which had supported the rupee through aggressive interventions via dollar sales until last month, has allowed the rupee to fall 1.3% over the last seven trading sessions to a record low of 90.42 per dollar.
The rupee, down 5.5% for the year, is Asia’s worst-performing currency.
By signaling tolerance for a weaker rupee, the central bank indicates that its interventions will primarily aim to curb sharp volatility or speculative build-ups, rather than defend any specific rupee level, the sources mentioned.
“It doesn’t make sense to spend reserves when fundamentally everything is against the currency,” said one of the sources, who spoke on the condition of anonymity as they were not authorized to speak to the media.
The RBI did not immediately respond to an email seeking comment.
“As and when fundamentals and real dollar demand dictate, the central bank does let the rupee move more than it normally would,” the second source said.
India is one of the worst-hit markets in terms of outflows, with foreign investors selling stocks amounting to $17 billion so far this year. At the same time, foreign direct investment, trade, and offshore fundraising flows have slowed down.
While the currency’s fall below the psychologically important 90 per dollar mark has attracted attention and could embolden speculators, the central bank can intervene to stamp those out as needed, a third source said.
**Investors on Guard**
A weaker currency provides more policy flexibility to the central bank, but it could also diminish the appeal of Indian assets for overseas investors.
“A weakening Indian rupee is definitely a negative when it comes to investing in Indian equities and it is one reason why we are only neutral weight in India versus our benchmark,” said Sam Kongrad, an investment manager for Asian equities at Jupiter Asset Management.
MSCI’s India equities index has risen seven per cent this year, but currency weakness has trimmed its dollar returns to under two per cent — well below the roughly 80 per cent and 30 per cent gains posted by South Korea and Hong Kong, respectively.
“A resolution to the tariff situation with the U.S. can’t come soon enough and foreign flows from a potential global index inclusion will be very much needed,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Investments.
Over the long term, however, investors believe the sustained momentum in India’s strong economic growth could help offset the currency’s fall by boosting company earnings.
India’s GDP grew 8.2 per cent in the July-September quarter even as the rupee lingered at a record low, highlighting a divergence between the robust domestic economy and weak external demand.
“I’m not losing sleep over it,” India’s Chief Economic Advisor V Anantha Nageswaran said on Wednesday, referring to the rupee’s fall. The rupee’s weakness has had no impact on inflation, he added, expecting the currency to recover in 2026.
