Overview: Why the INR is slipping against the USD
The Indian rupee has struggled to keep pace with the U.S. dollar in recent sessions, continuing a decline as global dollar strength, foreign outflows, and domestic economic dynamics weigh on sentiment. With the currency hovering around the 90+ per USD mark, market participants are weighing several enduring factors that could keep the INR under pressure in the near term. Here are five key reasons driving the trend.
1) Persistent dollar strength and U.S. rate expectations
The dollar has benefited from higher U.S. benchmark rates and expectations of further monetary tightening, which tends to attract capital to dollar-denominated assets. As U.S. yields remain comparatively attractive, investors may favor U.S. securities over Indian assets, exerting upward pressure on the greenback and downward pressure on the rupee. Even a gradual shift in Federal Reserve policy can have outsized effects on EM currencies when risk appetite shifts or inflation data surprises to the upside.
2) Ongoing foreign outflows from equities and debt
Foreign portfolio investors (FPIs) have been net sellers in several periods, pulling money out of both Indian equities and bonds. Such outflows reduce demand for the rupee, widening the gap between demand for dollars and rupees in the onshore market. When FPIs pull back, the rupee tends to weaken, especially if the outflows arrive in a concentrated burst or coincide with broader risk-off moves in global markets.
3) Elevated crude oil prices and the energy import bill
India imports a substantial portion of its oil, making the rupee sensitive to movements in global crude prices. A spike in oil prices widens the import bill and can exacerbate the current account deficit (CAD), nudging the currency lower as the market prices in higher dollar demand to fund those imports. Conversely, any relief in oil prices could provide some relief, but the headwind remains a persistent factor for the rupee.
4) RBI policy stance and domestic macro data
The Reserve Bank of India’s policy decisions and its communication influence sentiment toward the rupee. If market participants interpret RBI guidance as less aggressive on inflation containment or rate differentials, the rupee could underperform. Domestic macro data—such as inflation, growth indicators, and CAD measurements—also shape expectations about rate trajectories and capital flows, contributing to near-term volatility.
5) Global risk sentiment and external shocks
Emerging-market currencies, including the rupee, are sensitive to global risk appetite. Heightened geopolitical tensions, trade dynamic shifts, or unexpected macro shocks can trigger risk-off moves that favor the dollar as a safe haven. In such environments, even a stable domestic outlook may be overshadowed by global currency dynamics, keeping the INR under pressure against the USD.
What to watch next
Investors will be focusing on the trajectory of FPI flows, movements in U.S. yields, and oil prices as primary drivers of the INR. The RBI’s commentary and any policy actions aimed at stabilizing the currency or addressing CAD will remain crucial. A supportive roadmap could include calibrated liquidity measures, communication that anchors expectations on rate differentials, and an evident focus on stabilizing capital flows during episodes of volatility.
In summary, while the INR’s path is not predetermined, the combination of a strong dollar, persistent external outflows, energy import costs, domestic macro dynamics, and global risk sentiment provides a framework for the rupee to remain under pressure in the near term.
