Topic 3: RUPEE : DIM LIGHT

In August 2025, the Indian rupee witnessed significant weakness against the US dollar, sliding to trade in the range of ₹87.5 to ₹88.33 per USD and touching fresh record lows by the end of the month as global and domestic pressures converged to weigh on sentiment, capital flows, and trade expectations. The most decisive trigger came on August 1, when the US government announced steep 50% tariffs on Indian exports, an event that immediately spurred concerns about India’s export competitiveness, widened trade deficit projections, and triggered heavy demand for dollars in currency markets. Investors, already cautious amid elevated global interest rates and slowing global growth, reacted sharply by accelerating foreign portfolio investor (FPI) outflows; by late August, FPIs had withdrawn more than $9.7 billion from Indian equity and debt markets since June, with a sharp spike in withdrawals post-tariff announcement, intensifying downward pressure on the rupee. The exodus reflected both risk aversion and a preference for safe-haven assets like the US dollar, which was strengthening globally, leading to a double blow for the rupee. On domestic front, despite positive GDP growth readings and persistently low consumer inflation, the currency found little relief as rising import bills and widening trade gaps amplified vulnerability, while the Reserve Bank of India (RBI) adopted a cautious approach, intervening intermittently to smooth volatility but refraining from aggressive defence in order to conserve foreign exchange reserves and deter speculative positioning. This policy stance allowed market forces to largely dictate the rupee’s trajectory, resulting in a steady slide that culminated in levels near ₹88.33 per USD by month-end. Market participants also noted that India’s inclusion in global bond indices and the mid-August sovereign rating upgrade by S&P Global provided temporary sentiment relief, but these positives were overshadowed by capital flight, trade uncertainty, and the broader global context of higher US yields narrowing the India-US interest rate differential to multi-decade lows. Furthermore, geopolitical tensions—including US-India trade frictions and continued uncertainty surrounding oil trade flows with Russia—added layers of risk premium that investors priced into the currency outlook. The consequence was not only a weaker rupee but also tighter external financing conditions and elevated borrowing costs for corporates and the sovereign, reinforcing the linkage between external shocks and domestic vulnerabilities. In essence, August 2025 marked one of the most volatile months for the rupee in recent history, with its depreciation driven primarily by trade-related shocks, heavy FPI outflows, and global risk aversion, only partially cushioned by RBI’s calibrated interventions, leaving the currency under sustained pressure despite India’s otherwise supportive macroeconomic fundamentals.