What is driving the rupee down?

THE rupee slipped below the psychological mark of Rs 90 to a dollar last week, and there are two key reasons for that. First, foreign funds are selling their financial investments and exiting India with their dollars. Second, India's rich are using our dollars to import tonnes of gold.Let us look at each of these separately.Foreign funds bring in dollars to invest in Indian stocks and shares, mutual funds and bonds. This year, they have sold more than they have bought. NSDL (National Securities Depository Limited) data shows that foreign financial investors took out roughly Rs 78,000 crore from Indian markets across all types of instruments.When a foreign fund sells to exit the Indian market, it converts the rupees it received into dollars. So, if there is heavy selling by foreign investors, the demand for the dollar rises, causing its 'price' — or exchange rate — to rise relative to the rupee. This is one key reason why the rupee has weakened so much this year.Strangely, this has happened even though the dollar itself has weakened against other currencies. The dollar index, which tracks the dollar's value in relation to six major foreign currencies, has slipped nearly 10 per cent from where it was in mid-January. This suggests that foreign investors are taking out dollars from India, but are not going to the US. They have moved to other 'emerging markets' like South Korea, Greece, Brazil, Mexico and even China, each of which has seen stock market booms this year.The reason appears to be that foreign funds have lost confidence in India Inc. Over the past three years, Indian companies have made huge profits despite tepid revenue growth. This has largely been thanks to lower growth in raw material costs and wage bills and low corporate tax rates. Many foreign market watchers had expected the lack of consumption demand would finally catch up with Indian corporates and their profit margins would shrink in 2025. Since the markets always 'discount' the future, they have been selling heavily for most of the year.All of these have put downward pressure on the rupee as foreign funds bought more dollars. The RBI has intervened in this process, selling dollars that it holds in its reserves. It sold $38 billion between January and September 2025. The problem is that when the RBI sells dollars to banks, it takes out an equivalent amount of rupees from the banking system. This means that banks have fewer rupees to lend, causing actual interest rates to rise. The RBI can counteract that by buying bonds from banks and giving them rupees in exchange.But there are limits to such intervention, especially when India officially runs a floating exchange rate, allowing the currency to settle at market-determined rates. It is also difficult to calibrate how much excess currency can be injected into the system without causing inflation. Again, the RBI cannot deplete its dollar reserves too much simply to prop up the rupee. India is heavily dependent on imports — especially of crude oil — and we need a comfortable forex buffer.One way for the RBI to hold foreign investors in India is to offer higher interest rates. But even that is not possible, given that retail inflation has been close to, or lower than, the 2 per cent lower end of RBI's inflation-targeting mandate. Borrowings from banks — which indicate whether corporates are keen to invest in building more capacity and consumers want to buy homes and cars — has slowed down sharply in 2025. Loans given by banks, which were growing at high double digits for most of 2023 and 2024, have dropped to single digits since April 2025. The RBI, therefore, had no option but to lower interest rates, instead of raising them.One big reason for foreign investors' exit is their concern over Trump's punitive tariffs on Indian goods. When the intention was announced in January, foreign investors sold heavily. When the actual levies imposed in April turned out to be less than what the markets had anticipated, foreign funds began reinvesting for three consecutive months. Another round of heavy selling began in August when Trump raised the tariff rate to 50 per cent, ostensibly to punish India for buying Russian crude.Interestingly, India's exports to the US have actually increased between April and October this year instead of declining. They have grown by 10 per cent in dollar terms in April-October 2025 compared to the same period in 2024. In fact, this is higher than the 6 per cent growth seen in April-October 2024. If India's total merchandise exports are flat this fiscal, it is because of a sharp decline in exports to large trading partners like the Netherlands, the UK, Singapore and Saudi Arabia. So, the Trump tariffs might have had a psychological impact on financial flows, but they have not affected actual merchandise exports to the US.The biggest reason for the sharp decline in the rupee is the massive gold imports in September and October this year, totalling more than $24 million. That is 2.5 times the value of gold imported in the same period last year. Even if one accounts for the 50 per cent rise in gold prices in this period, physical gold imports have gone up by 65-70 per cent.There can be no doubt that most of this demand has come from India's rich. A part of the reason is that they have run out of avenues to invest. But a more likely reason is that they are trying to derisk their investments by transferring some of their wealth into an 'eternal' asset like gold — it might not have any productive role, but its value as an asset class has endured millennia.This raises questions about what so-called 'smart money' thinks about India's growth story. Not just the biggest funds in the world, but even India's rich seem to believe that it is going to get tougher to make their money grow in India. That, ultimately, is the single biggest reason for the rupee's decline.

What is driving the rupee down?

Even India’s rich are shifting wealth into gold, signalling deeper worries about the growth story

Aunindyo Chakravarty

What is driving the rupee down?

Even India’s rich are shifting wealth into gold, signalling deeper worries about the growth story

Aunindyo Chakravarty

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