Topic 3: RUPEE: TUMBLING EFFECT

In July 2025, the Indian Rupee experienced a steady depreciating trend against the US Dollar, reflecting a combination of global and domestic pressures. The exchange rate, which began the month at around ₹85.64 per USD, gradually weakened and ended the month in the range of ₹86.50–₹86.75. This decline of approximately 1–1.2% marked the rupee’s lowest level since mid-March 2025. Daily fluctuations within this range were observed, but the overall direction of movement pointed clearly toward a weaker rupee amid sustained external headwinds and capital outflows. One of the primary drivers of the rupee’s decline was the continued strength of the US dollar. The Federal Reserve’s decision to pause interest rate cuts and maintain elevated rates for a longer period bolstered the dollar’s value globally. Strong US macroeconomic indicators, including solid employment figures and resilient consumer spending, further reinforced the dollar’s appeal among global investors. This strength, in turn, put downward pressure on emerging market currencies, including the Indian Rupee, which became relatively less attractive in a high-yield dollar environment. Foreign institutional investor (FII) outflows also significantly influenced the rupee’s trajectory in July. Indian equity markets saw net FII selling of over $1.5 billion during the month, primarily due to global risk aversion and concerns around trade policy. In the debt segment, portfolio flows remained cautious, with investors closely watching global monetary trends and India’s policy responses. Trade tensions added another layer of pressure. The announcement by the US government regarding potential tariffs of 20–25% on Indian exports raised alarms about the future of bilateral trade relations. This development not only rattled equity markets but also weighed heavily on currency sentiment, with concerns about India’s export competitiveness and trade balance prompting further rupee weakness. Market participants feared that any slowdown in exports would worsen the current account situation, thereby impacting the broader macroeconomic outlook. Rising crude oil prices were another key contributor to the rupee’s depreciation. Escalating geopolitical tensions in the Middle East, especially involving Iran and Israel, drove global oil prices higher. Rising oil prices also create inflationary pressure, which can constrain monetary policy flexibility and affect investor sentiment. These inflationary concerns further dented confidence in the rupee’s near-term prospects. Despite these headwinds, India’s domestic economic indicators offered some resilience. The country recorded strong manufacturing growth, evidenced by the HSBC India Manufacturing PMI rising to a 16-month high. Additionally, fiscal indicators showed improvement, with a narrowing deficit and government commitment to long-term debt reduction. However, these positives were largely overshadowed by short-term global challenges, including capital outflows, geopolitical instability, and trade uncertainty. Investors prioritized risk management over macro fundamentals, thereby limiting the rupee’s support from domestic strength. In response to the mounting volatility, the Reserve Bank of India (RBI) stepped in selectively to stabilize the rupee. While not engaging in aggressive intervention, the central bank likely sold dollars during periods of intense pressure to smooth out excessive currency fluctuations. RBI’s actions were aimed at curbing panic selling while conserving foreign exchange reserves, especially in a backdrop of uncertain external conditions. The central bank’s presence in the market helped limit extreme volatility but could not fully arrest the rupee’s weakening trend due to the broader strength of the dollar and persistent outflows. Overall, the Indian Rupee’s depreciation in July 2025 was driven by a confluence of factors: the firm US dollar, steady capital outflows from equities, concerns over potential US tariffs on Indian exports, rising oil prices, and inflation risks. While the RBI’s calibrated interventions helped manage sharp movements, global macroeconomic uncertainties and geopolitical tensions continued to dominate market sentiment. Despite relatively sound domestic economic indicators, external pressures overwhelmed the currency, keeping it on a weaker footing throughout the month. As investors look ahead, the rupee’s trajectory will likely depend on how global monetary policy evolves, whether geopolitical risks escalate, and how trade negotiations between India and its key partners unfold.