1. The “Tariff Shock”: A Trade War with Washington

The single most significant weight on the Rupee since late 2025 has been the aggressive trade stance adopted by the United States. Following the imposition of punitive 50% tariffs on select Indian goods, particularly those linked to Russian oil processing or high-competition sectors, India’s export engine has struggled.

• Sectoral Impact: Labor-intensive industries like textiles, handicrafts, gems, and leather have been hit hardest. When these goods become 50% more expensive for American buyers, order volumes plummet.
• The Dollar Gap: A decline in export earnings means fewer Dollars are entering the country. Simultaneously, India’s demand for Dollars to pay for essential imports (like high-tech machinery and electronics) remains high. This mismatch creates a structural demand for the Greenback, naturally pushing the Rupee lower.

2. The Massive Exodus of Foreign Capital (FII Outflows)

If the currency is the “price” of a nation’s assets, then the current price reflects a massive “sell” signal from global investors. In 2025, Foreign Institutional Investors (FIIs) pulled out a staggering ₹1.66 Lakh Crore ($18.9 Billion) from Indian equities.

This trend hasn’t stopped with the new year. In the first two trading sessions of January 2026 alone, FIIs offloaded another ₹7,608 Crore.

• Valuation Concerns: For much of 2025, Indian stocks were trading at high premiums. Global funds shifted capital to other emerging markets or back to the US, where AI-driven growth and high interest rates offered better risk-adjusted returns.
• The Repatriation Effect: Every time an FII sells a stock on the NSE or BSE, they receive Rupees. To take that money home, they must sell those Rupees to buy Dollars. This constant selling pressure on the INR is a primary reason the ₹90 mark was breached so easily.

3. The RBI’s “Goldilocks” Gamble

The Reserve Bank of India (RBI) finds itself in a delicate balancing act. In December 2025, the RBI delivered a “double bonanza”: it cut the repo rate by 25 basis points to 5.25% and injected ₹1.5 Lakh Crore of liquidity into the system.

• Why the cut? Domestic inflation has cooled to a “Goldilocks” level of 2.0%, giving the RBI room to prioritize growth over currency defense.
• The Consequence: Lower interest rates make a currency less attractive to “carry trade” investors who borrow in low-interest currencies to invest in high-interest ones. By signaling a more accommodative stance, the RBI has effectively told the market that it is willing to tolerate a weaker Rupee if it helps keep the domestic economy humming.

4. The Rise of the “Safe Haven” Dollar

It is important to remember that the Rupee’s weakness is partly a reflection of the US Dollar’s exceptional strength. The US Dollar Index (DXY) currently sits at 98.38, reflecting broad-based demand for the Greenback amidst global geopolitical uncertainty.

When the world gets nervous, whether due to trade tensions in Asia or conflict in Europe, capital flows to the US Dollar as a “safe haven.” This global “risk-off” sentiment automatically devalues emerging market currencies like the Rupee, regardless of how strong India’s internal GDP numbers might be.

5. The Widening Trade Deficit & Oil Dynamics

Despite India’s efforts to diversify its energy sources, it remains heavily dependent on imported oil.

• The “Net FDI” Problem: For three consecutive months leading into November 2025, India’s Net Foreign Direct Investment (FDI) actually turned negative. This means more money was leaving the country via profit repatriation and debt repayment than was coming in through new factories or projects.
• Import Intensity: India’s manufacturing ambitions (under PLI schemes) require the import of sophisticated components. As the Rupee weakens, these imports become more expensive, further widening the trade deficit and creating a vicious cycle of currency depreciation.