When A Currency Breaks, Everything Shakes
It was supposed to be just another trading day in December
2025, but the rupee had other plans. As morning bells rang across India's forex
markets, the currency collapsed to a historic low of 90.56 against the US
dollar, erasing decades of perceived stability in one fell swoop. By the
afternoon, nervous traders and worried investors were asking the same
question: How did we get here?
The answer, it turns out, isn't simple. It never is with
currencies. But buried beneath the complexity lies a story that will reshape
how India's 1.4 billion citizens spend money, invest savings, and navigate the
next economic chapter.
The Numbers Tell A Brutal Story
Let's start with what happened—not speculation, but raw
fact.
According to Times of India, the rupee has depreciated 4.7%
year-to-date in 2025 and over 5.8% in the last one year against the US dollar.
But that nominal number masks something far more concerning: in real effective
exchange rate (REER) terms, the weakness has been staggering. The rupee has
weakened by an estimated 8.6% year-to-date through November, and 12.1% over the
past year.
To put this in historical perspective, according to BofA
Securities as cited in Times of India, this ranks among the largest
depreciation episodes India has experienced. The rupee weakened approximately
8.7% in 2018, 14% in 2013, and 18.7% in 2008. We're not quite at 2008
levels—yet—but we're firmly in "major currency crisis" territory.
What triggered this collapse? The immediate catalyst seems
straightforward on the surface: the India-US trade deal remained unsigned as of
mid-December, and foreign investors were hitting the exit door. According to
Telegraph India, the rupee depreciated 24 paise to hit the record low of 90.56
on Friday, with uncertainty over the India-US trade deal and persistent foreign
fund outflows cited as the primary drivers of weakness.
But here's where it gets interesting: the capital flows
story runs deeper than just trade uncertainty.
Capital Flows: The Real Culprit
Foreign institutional investors haven't just been
nervous—they've been actively selling. According to Telegraph India, FIIs sold
equities worth Rs 2,020.94 crore on a single day (Thursday of that week), a
staggering volume that signals not gradual withdrawal but accelerating exit.
BofA Securities, as reported in Times of India, paints the
full picture: "The primary challenge has been on capital flows, and that
has been an issue which remains multifaceted, and has been seen across FDI
flows, FPI flows, and debt related inflows, which have to a certain extent
stalled."
How bad has the central bank's intervention been? According
to Times of India's coverage of BofA analysis, the RBI sold $65 billion in the
open market between October 24 and September 25 (likely a reporting period),
and was running a large short forward book position of $63.6 billion as of
end-October—likely larger by November given the rupee pressure.
In plain English: India's central bank is burning through
foreign exchange reserves at a pace that should concern policymakers. The RBI
is literally selling dollars at an accelerating rate just to keep the rupee
from collapsing even further.
What's Driving The Foreign Exodus? "Trump
Tantrums" And Trade Wars
Here's the uncomfortable truth: India's rupee weakness isn't
really about India. It's about the United States, and what's happening in the
White House.
According to a Mint opinion piece analyzing the situation,
there's a useful historical parallel: the 2013 "taper tantrum," when
the Federal Reserve signaled a pullback in stimulus and global emerging markets
collapsed. That article noted that "Currency volatility is like history.
No two episodes repeat, but some sure do rhyme."
This time, the rhyme is different, but the rhythm is eerily
similar. Whereas 2013 was about Fed tightening, 2025 is about what Bloomberg's
Andy Mukherjee (cited in The India Cable) termed "Trump tantrums"—the
global uncertainty created by the incoming Trump administration's protectionist
trade policies and tariff threats.
Mukherjee noted that while RBI governor Sanjay Malhotra lost
control of monetary policy during the 2013 taper tantrum, "his challenge
in 2026 will be Trump's tantrums."
The irony? According to multiple sources, India's
fundamental economic indicators aren't broken. Reuters reported that India's
November retail inflation rose just 0.71%, staying below the central bank's
target range. Export competitiveness remains intact. The current account
deficit is controlled. Yet none of this matters when foreign investors are
panicking about US trade policy.
The Five Channels Through Which Rupee Weakness Shakes The
Economy
When a currency weakens this dramatically, the economic
shockwaves ripple through five distinct pathways. Understanding each is
critical to grasping what comes next.
Channel 1: The Sentiment Hit
A weak currency doesn't just affect spreadsheets—it affects
psychology. According to BofA Securities' analysis cited in Times of India,
historically during periods of more than 10% rupee weakness, the catalyst for
sentiment weakening becomes visible in consumer confidence, business sentiment,
and policy uncertainty measurements. With the rupee now at 12.1% real weakness
over one year, this channel is already active.
What does weakened sentiment mean in practical terms?
Reduced consumer spending. Delayed business investment decisions. Stock market
volatility. These are the canaries in the coal mine of economic slowdown.
Channel 2: GDP Growth Impact—The Import-Export Tango
The relationship between exchange rates and GDP is
multifaceted, but the primary channel works through imports and exports.
According to Times of India's coverage of research cited by
BofA, "a 5% decline in RBI's Real Effective Exchange Rate can result in a
corresponding 2.3% reduction in imports." With our real depreciation now
at 8.6% year-to-date, that suggests imports could contract somewhere in the
4-5% range.
At first blush, this sounds positive—fewer imports mean less
pressure on the current account. But it's more complicated. Most import
compression comes from reduced consumer and discretionary spending, which
directly suppresses GDP growth.
On the export side, the story is less encouraging. Times of
India notes that per a 2023 Ministry of Finance study, "the export
sensitivity to 5% REER depreciation can typically increase exports by
~2%." With an 8.6% depreciation, that implies roughly 3.4% export growth
from the depreciation effect alone.
But here's the catch: US tariff threats and trade
uncertainty are muting this benefit. As BofA noted in Times of India's
reporting, "with the shadow of the weakness emanating from the tariffs
imposed by the US, we believe the gains on the trade front, especially exports
will be somewhat stunted."
The net effect on GDP? Likely negative in the short term,
though potentially positive in 12-18 months if the J-curve effect materializes
(the economic principle that current account deficits initially worsen before
improving after currency depreciation).
Channel 3: The Inflation Trap—And Why It Might Not Happen
This Time
This is where the 2025 rupee crisis differs markedly from
2013. Back then, a weakening rupee meant imported inflation, which meant higher
prices on everything from crude oil to gold to imported consumer goods.
But today, according to Times of India's analysis of BofA
research, "the global economic context" is entirely different. Crude
oil prices have collapsed. According to Telegraph India, Brent crude was
trading at $61.69 per barrel—roughly $15 per barrel lower than the previous
year's average.
More critically, BofA Securities noted in Times of India's
reporting, "the ongoing deflationary trends in China have spread across
the region, including India. This suggests that the effects of a weakened
exchange rate may actually be limited."
The data backs this up. Times of India notes that WPI
(Wholesale Price Inflation) has been in deflation for an extended period, with
the WPI index still below the highs seen in June 2022. This matters because WPI
is highly sensitive to imported prices and currency movements.
What about the theoretical risk? According to Times of
India, RBI analyses suggest that a 5% reduction in REER could cause a 35-basis
points rise in inflation over 3-4 quarters. Our 8.6% depreciation suggests
potential 60-70 basis point upward risk to inflation. But the unique global
commodity backdrop—deflation in China, low energy costs, abundant global food
supplies—is likely to blunt this impact.
Reuters reported that India's November retail inflation was
already low, at just 0.71%, reinforcing the point that inflation pressures
remain muted despite rupee weakness.
Channel 4: The External Sector Story—The Silver Lining
Here's where the long-term case for India's economy emerges
from the gloom.
According to BofA Securities analysis cited in Times of
India, "historical analysis suggests that trade balance actually
improves—imports take a hit because they cost more and exports get a leg up
because they are cheaper for the country that imports them."
The numbers are striking. BofA projected that "the
implied trade balance improvement based on historical sensitivities can be
anywhere between 0.8-1 times based on historical studies." Times of India
reported that an RBI study showed "rupee depreciation in real terms
enhances the trade balance progressively," with the impact "more
significant in periods of rupee's depreciation compared to appreciation
periods."
Translating to dollars: according to Times of India's
coverage of BofA analysis, if current depreciation holds, "the implied
trade balance improvement could be as large as 5-7% of the trade balance which
in current terms saves India almost $7-12 billion."
For services exports, the picture is even brighter. Times of
India notes that per an RBI study, "services exports improve by 0.8% for
every 1% FX weakness over time." Given India's massive IT services sector,
this depreciation should boost competitiveness in one of India's strongest
economic engines.
One caveat: remittances. Times of India explains that
"bouts of a weaker exchange rate can result in a small period of lower
inflows, but typically once the rupee depreciation stalls, it is followed by a
meaningful increase in remittances flow, to use the better cross exchange
rate."
Channel 5: The Fiscal Puzzle
The government's budget picture becomes more complex when
the rupee weakens. Fertilizer subsidies will likely rise due to higher import
costs. But there's a silver lining, according to Times of India's analysis of
BofA research: "the current rupee depreciation, combined with RBI's
ongoing market interventions, is likely to enhance the central bank's foreign
exchange earnings. This could result in increased RBI dividend payments in
fiscal year 2026-27, offering potential revenue support."
This matters because RBI dividend payments are a direct
revenue source for the government. As the RBI continues to sell dollars to
stabilize the rupee, it locks in forex gains that flow back to the Treasury.
What Happens Next? The RBI's Balancing Act
The most pressing question for investors, businesses, and
ordinary citizens: where does the rupee go from here?
According to Bloomberg's reporting in a December 12 article
(cited in The India Cable), "bankers and analysts expect the currency to
keep drifting lower in the near term with interventions by the central bank
keeping a lid on volatility."
This captures the core of RBI Governor Sanjay Malhotra's
dilemma. He can't let the rupee collapse freely—that would unleash imported
inflation and capital flight. But he also can't simply anchor the currency at a
stronger level without depleting reserves unsustainably.
Times of India reports BofA Securities' outlook: "BofA
believes that the central bank's management of rupee levels will be key. RBI's
reserves remain adequate, but continued portfolio outflows could make these
operations unsustainable or build-up of RBI's short dollar forward positions
may skew return expectations on the rupee."
The base case forecast from BofA, as reported in Times of
India, is surprisingly optimistic: "Overall, we believe dollar weakness
next year would still support mild rupee appreciation and that could pick-up
pace around the seasonally favorable first quarter for the rupee. We forecast
the rupee to reach 86/USD by end-2026."
That would imply roughly 5% appreciation from current
levels—a meaningful relief for importers and investors, though far from a
complete reversal of recent weakness.
But this forecast hinges on two critical assumptions: first,
that the India-US trade deal gets resolved, reducing uncertainty for portfolio
investors; and second, that global dollar weakness materializes, as Fed rate
cuts gain traction.
The Trade Deal Wildcard
As of mid-December 2025, the India-US trade negotiations
remained unfinished, with talks extending beyond their initially planned
conclusion. According to Telegraph India, the last day of talks between Indian
and visiting American delegations was the trading day when the rupee hit its
record low—hardly a coincidence.
The unresolved trade deal is the single biggest source of
uncertainty for foreign investors. As Times of India noted in BofA's analysis,
"an effective resolution may pave the way for a relatively stronger rupee
compared to the present scenario" and "Finalization of trade deal to
reduce the tariffs would be important in reducing uncertainty for equity
investors."
If tariff threats recede and a trade deal is finalized in
early 2026, we could see a sharp reversal in foreign fund flows—which would
instantly relieve rupee pressure. If tariffs escalate and protectionism
deepens, the pressure will persist, and the RBI's intervention will become even
more critical.
What This Means For You: The Practical Impact
Beyond the macroeconomic abstractions, rupee weakness
affects real lives in tangible ways.
For Importers and Exporters: Import costs will
rise across the board, from petroleum products to electronics to consumer
goods. Companies with unhedged dollar exposure will see margins compressed.
Exporters, conversely, benefit—though global trade uncertainty may offset some
gains.
For Savers and Investors: If you hold
dollar-denominated assets or have overseas investments, the rupee depreciation
is a tailwind. If you're saving in rupees for future overseas spending (like
education or travel), your costs have just risen significantly.
For Businesses with Debt: Any Indian company
with dollar-denominated borrowings faces higher repayment costs. Times of India
noted that BofA believes "a weaker rupee can add to the public and private
debt burden at the margin, especially if they are not matched fully from a
forex hedging perspective."
For Ordinary Consumers: While inflation risks
are lower than in previous currency crises (thanks to low global commodity
prices), watch for gradual price increases in imported goods. The impact won't
be immediate, but it will compound over quarters.
The Bigger Picture: Is This The New Normal?
The 2025 rupee crisis isn't an isolated event—it's a symptom
of deeper structural changes in global financial markets.
As Mint's opinion piece noted, we've shifted from the
"taper tantrum" era of 2013 to what it calls the "Trump
tantrum" era. Emerging market currencies now face a new hazard: US
protectionism and geopolitical volatility emanating from the Trump
administration's unpredictability.
This suggests that even if the rupee stabilizes in early
2026, Indian investors and policymakers should prepare for sustained
volatility. The RBI will need to maintain higher intervention capacity. Indian
companies will need to enhance forex hedging practices. The government will
need to accelerate reforms that reduce our reliance on foreign capital inflows.
The Strategic Takeaway
Here's what this rupee crisis reveals about India's economic
position, and what should concern policymakers most:
India's fundamentals—inflation control, current account
discipline, export competitiveness, and service sector strength—remain sound.
The RBI, under Governor Malhotra, is managing the crisis with textbook
interventions: selling reserves to smooth volatility without trying to
permanently defend an unsustainable level.
But the crisis also exposes a vulnerability: India's
economic growth is increasingly dependent on foreign capital flows, which are
themselves dependent on global sentiment factors entirely outside Indian
control.
Until India generates sufficient domestic savings to fund
its growth, until the private sector achieves higher profitability to attract
equity investors independent of macro momentum, and until the government
reduces fiscal deficits to reduce external borrowing needs, the rupee will
remain vulnerable to external shocks.
The good news? According to Times of India's analysis of
BofA's outlook, this weakness may eventually strengthen India's long-term
competitiveness. A weaker rupee, by shifting consumption patterns toward
domestic goods and improving export competitiveness, could gradually rebalance
India's economy toward more sustainable, internally-driven growth.
But that benefit lies 2-4 quarters ahead, at best. In the
near term, rupee weakness is a headwind that Indian businesses must navigate,
Indian investors must hedge, and Indian policymakers must manage with all the
skill and discipline they can muster.
What Happens In 2026? Your Questions Answered
Will the rupee stabilize? Likely, yes—but only
if trade deal uncertainty clears. BofA's forecast of 86/USD by end-2026 assumes
resolution of current tensions.
Can RBI interventions continue indefinitely? No.
While reserves are adequate, sustained portfolio outflows could eventually
force a choice between letting the rupee weaken further or exhausting reserves.
This is the real risk scenario.
What's the upside scenario? If US dollar weakens
globally (due to Fed rate cuts) and India-US trade deal is finalized, the rupee
could appreciate more sharply than BofA forecasts, potentially reaching
84-85/USD.
What's the downside scenario? If tariffs
escalate further and global growth weakens significantly, the rupee could trade
into the 91-93 range, causing broader economic disruption.
The Final Word: Watch, Prepare, Adapt
The rupee's collapse to 90.56 isn't a temporary blip—it's a
signal that India's external sector faces structural challenges that can't be
wished away. But neither is it a harbinger of economic collapse. India has
navigated worse, and will likely navigate this too.
What matters now is clarity: from the government on trade
negotiations, from the RBI on its intervention strategy, and from corporate
India on how it will hedge and manage currency volatility in this new era of
geopolitical uncertainty.
The rupee crisis of 2025 may prove to be less memorable for
its severity and more memorable for what it revealed about India's
vulnerabilities—and what it demanded of Indian policymakers and business
leaders to address them.
Keep watching the rupee. Keep hedging your exposures. And
keep faith in India's long-term resilience. This storm, like all storms, will
pass.
What's Your Take?
How is rupee weakness affecting your business, investments,
or financial plans? What trade resolution would most help India's economy in
your view? Share your thoughts in the comments below—let's discuss the future
of India's currency and economy together.
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