India’s central bank is permitting a weaker rupee as the nation faces several external challenges, such as a growing trade deficit and a slowdown in dollar inflows into the fifth-largest global economy, according to three sources familiar with the bank’s strategy shared with Reuters.
Previously, the Reserve Bank of India (RBI) had supported the rupee through significant dollar sales, but recently allowed it to decline by 1.3% over the past seven trading days, reaching a record low of 90.42 per dollar.
The rupee, which has fallen 5.5% this year, is currently the worst-performing currency in Asia.
By showing a readiness to accept a weaker rupee, the RBI signals its intention to intervene primarily to manage extreme volatility or speculative activity rather than to maintain a specific exchange rate, the sources indicated.
“Using reserves doesn’t make sense when the fundamentals oppose the currency,” stated one source, who requested anonymity due to not being authorized to discuss publicly.
The RBI has yet to respond to an email requesting comments.
“When real dollar demand and fundamentals dictate, the central bank allows the rupee more flexibility,” the second source explained.
India has faced significant market outflows, with foreign investors selling $17 billion worth of stocks this year. Concurrently, foreign direct investment, trade, and offshore fundraising have all decelerated.
Although the rupee’s fall below the 90 per dollar mark has drawn attention and may encourage speculators, the central bank is prepared to intervene if needed, a third source mentioned.
Investors Cautious
A weaker rupee offers the central bank more policy flexibility but could reduce the attractiveness of Indian assets for foreign investors.
“The weakening rupee is a drawback for investing in Indian stocks, which is why we maintain a neutral position in India compared to our benchmark,” noted Sam Kongrad, an investment manager at Jupiter Asset Management.
Although MSCI’s India equities index has risen by seven percent this year, the rupee’s weakness has limited returns in dollar terms to under two percent, significantly lower than the approximately 80 percent and 30 percent gains seen in South Korea and Hong Kong, respectively.
“A resolution to the U.S. tariff issue is urgently needed and foreign flows from potential global index inclusion are crucial,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Investments.
In the long run, however, investors believe that continued strong economic growth in India could counterbalance the rupee’s decline by boosting corporate earnings.
India’s GDP grew by 8.2% in the July-September quarter, even as the rupee hit record lows, highlighting the contrast between a robust domestic economy and weak external demand.
“I’m not worried,” India’s Chief Economic Advisor V Anantha Nageswaran commented on Wednesday about the rupee’s decline, noting that it hasn’t affected inflation and anticipating a recovery by 2026.
